Doing Business in the Russian Federation 2006* *connectedthinking
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Doing Business in the
Russian Federation 2006*
*connectedthinking
PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients andtheir stakeholders. More than 130,000 people in 148 countries work collaboratively using connected thinking to develop fresh perspectives and practical advice.
"PricewaterhouseCoopers" refers to the network of member firms of PricewaterhouseCoopers International Limited, each of which is a separate and independent legalentity.
© 2006 All copyright to the original text and design belongs to PricewaterhouseCoopers. 'PricewaterhouseCoopers' refers to any legal entity duly registered in Russiathat is a member of the PricewaterhouseCoopers global network of firms.*connectedthinking is a regsitered trade mark belonging to PricewaterhouseCoopers LLP. Registration No. BS-BS-05-0823-A.0505.DvL/JL.
ContentIntroduction...........................................................................................................................................3
General Country Information ..............................................................................................................................3
Political System ......................................................................................................................................................3
Chapter 1. Doing Business........................................................................................................................4
The Russian Economy..........................................................................................................................................4
Leading Sectors .....................................................................................................................................................5
Mergers & Acquisitions ........................................................................................................................................7
Chapter 2. Legal Framework ......................................................................................................9
Types of Business Entities ..................................................................................................................................9
Formal Registration Requirements .................................................................................................................10
Tax Litigation.........................................................................................................................................................10
Taxation...................................................................................................................................................................11
Intellectual Property Rights...............................................................................................................................11
Privatization...........................................................................................................................................................12
Subsoil Legislation..............................................................................................................................................13
Real Estate ...........................................................................................................................................................13
Mergers & Acquisitions ......................................................................................................................................15
Capital Markets.....................................................................................................................................................16
Licenses ................................................................................................................................................................17
Currency Regulations .........................................................................................................................................17
Regulatory Structures for the Russian Financial Sector...........................................................................18
Chapter 3. Accounting and Audit ..........................................................................................20
Accounting Principles and Practices .............................................................................................................20
Audit Requirements and Practices .................................................................................................................23
Appendix 1. Differences Between Russian Accounting Rules and IFRS ..............................................25
Chapter 4. Taxation..........................................................................................................................27
Tax System ............................................................................................................................................................27
Tax Administration...............................................................................................................................................27
Principal Taxes......................................................................................................................................................28
Tax Treaties ............................................................................................................................................................32
Industry Specifics................................................................................................................................................33
Chapter 5. Customs........................................................................................................................36
Chapter 6. Labour Relations and Social Security ..........................................................37
Employment Relations .......................................................................................................................................37
Stock Options and Other Equity Based Compensation Plans ................................................................38
Foreign Personnel ...............................................................................................................................................38
Chapter 7. Corporate Transparency............................................................................................40
PricewaterhouseCoopers in the Russian Federation.............................................42
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General Country Information
� Territory (million km2): 17,075 � Capital: Moscow� Population (million): 142.7� GDP (USD billion): 766� GDP per capita (USD): 5,320� Language: Russian� Main religions: Russian Orthodox, Muslim� Government type: Federal republic� Currency: Rouble� Average exchange rate in 2005: RR 28.3 – US$1� There are 13 cities with a population of over 1 million people:
Moscow, St. Petersburg, Novosibirsk, Nizhni Novgorod, Ekaterinburg,
Samara, Omsk, Kazan, Chelyabinsk, Rostov-on-Don, Ufa, Volgograd and Perm
Political System
Russia is a federative presidential republic. According to the Constitution established in 1993, the President
of the Russian Federation sets basic domestic and foreign policy. The President is also Commander-in-Chief
of the Armed Forces. Vladimir Putin was re-elected president on 14 March 2004.
The Federal Assembly consists of two legislative chambers: the Federation Council (upper chamber
of parliament) and the State Duma (lower chamber). The majority of deputies in the State Duma are
members of the pro-presidential party, United Russia. On the whole, the political situation in Russia is stable.
Introduction
4
The Russian Economy
Economic Performance
The Russian economy, displaying positive new
trends, was very successful in 2005. Real GDP
increased by 6.4% and industrial production was up
by 4%. Record volumes and prices on main exports
in the energy sector, first and foremost, conditioned
a steady balance of payments.
Export revenues increased by 33.9% to US$245.3
billion.
As a result of Russia's strong economy, Standard &
Poor's Ratings Service raised its long-term
sovereign credit rating for Russia to BBB+ on 4
September 2006. Moody's Investors Service left
Russia's investment-grade rating at Baa2 with an
outlook of Stable. The Fitch rating agency upgraded
Russia's rating to BBB+.
In 2005, CPI inflation was 10.9%, down 0.8% from
the previous year.
One of the most important components of inflation
in 2003 to 2005 was the rise in the tariffs levied
on the housing and utilities services, which more
than doubled between January 2003 and December
2005.
In 2006, the government is planning to bring down
the inflation rate to 8%.
In 2005, the growth in direct foreign investment was
38.9%. The share of such investment in the total
amount of foreign investment increased to 24.4%,
compared with 23.3% in the previous year. The total
amount of foreign investment made in the
non-financial sector was US$53.65 billion,
an increase of 32.4%.
Luxembourg, the Netherlands, Great Britain, Cyprus,
Germany, the US and France remain the main
investors in the Russian economy.
As of 30 June 2006, the amount of gold and foreign
exchange reserves had reached US$250.6 billion.
In April 2006, unemployment totaled 5.5 million
people, or 7.5% of the economically active
population. The economically active population
numbered 73.9 million people, or 51% of the total
population of Russia.
Population
Russia's well-educated workforce is an important
asset for long-term growth. Russia's relatively
low-cost and generally highly skilled workers are one
of the main attractions for investors. The resident
population of the Russian Federation as of
1 January 2006 was 142.7 million people, down 0.7
million from 2004. Russia's population will continue
to fall in the mid term.
Chapter 1.
Doing Business
Indices of Basic Macroeconomic Indicators in 1999-2005 (% against the preceding year)
*The dynamics of industrial production is given by kinds of economic activity.
Source: Rosstat, Central Bank of Russia
2001 2002 2003 2004 2005
Gross domestic product (GDP) 105.1 104.7 107.3 107.2 106.4
Fixed capital investments 108.7 102.6 112.5 110.9 110.5
Volume of industrial production 104.9 103.7 107 106.1* 104*
Trade balance (US$ billions)48.1 46.3 59.9 85.8 118.3
Gold and foreign exchange reserves (US$ billions) 37 48 77 125 182
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Leading Sectors
Energy, Utilities & Mining
Russia's energy industry includes oil, gas, coal,
shale and turf production. It also includes electricity
generation, oil refining, centralized heating supply
systems and power transmission networks.
Accounting for a quarter of GDP, the energy industry
is currently one of the most important and
sustainable sectors in Russia. Its activity amounted
to a third of industrial output and half of the federal
budget, export, and hard-currency revenues.
Currently its energy, utilities, and mining sectors
(especially in electricity and gas) face major reforms
to encourage continued domestic and foreign
investment and to solve such crucial challenges as
high market energy demands and export restraints.
Russia is an important player in the international
energy trade, possessing a share in global primary
energy production of over 12%. Russia's energy
reserves are among the world's largest; a country
with less than 3% of the world's population,
it controls around 13% of the prospected oil
reserves, 34% of the natural gas, around 20%
of the coal, 32% of the brown coal, and 14%
of the uranium in the world.
The oil and gas sector remains the principal sector
of the Russian economy. It plays a leading role
in generating state budget revenues and secures
a positive trade balance for the country.
Russia is third on the list of the world's largest oil
producing countries, after Saudi Arabia and the US,
and is the second-largest exporter. In 2005, Russia's
oil production grew 2.5% on the year to 9.4 million
barrels per day (470.2 million tons). LUKOIL,
TNK-BP, Rosneft, and Surgutneftegas extracted
the highest volumes of crude oil in 2005.
Russia is the world's leader in reserves of natural
gas (48 trillion cubic meters).
In 2005, gas production rose 1% on the year to 640
billion cubic meters. Gazprom, Russia's state-run
natural gas monopoly, produces 85.5 % of Russia's
natural gas and operates the country's natural gas
pipeline.
Russia's total coal reserves are around 157 billion
metric tons. After China, the US, India and Australia,
Russia is the world's fifth-largest coal producer. Its
fast-growing national coal production reached 296
million tons per year in 2005.
In 2005, coal production rose 5.8% (compared with
2004) to 296 millions tons. Coal exports increased
by 6% on the previous year.
Russia's top coal-producing areas, accounting for
more than 95% of its total coal output, are
the Siberian, Far East, and Northwest federal
districts.
In the electricity sector, Russia relies on a 216.7-GW
generating capacity of over 700 power plants and
on a power transmission network of 2,500,000
kilometers (1,500,000 miles). RAO UES of Russia,
the national electricity leader, operates around 90%
of these assets.
In 2005, electric power output in Russia rose 20.3%
on the year to 952.2 billion kilowatts per hour (kWh).
Electric power consumption increased 15.9%
on the year to 940.1 billion kWh.
Russia's hydro-power plants generate 45.7 GW,
which accounts for nearly 21% of the overall
generating capacity, while 10 nuclear power plants
with 32 generating units provide 10% of the overall
generating capacity (23.3 GW).
The utilities sector is in the process of restructuring.
A reform program has been launched that aims
to dismantle the monopoly and create competition
in the market in order to attract investment and
induce mergers and acquisitions activity.
Metals
Along with oil and gas production, metallurgy is one
of the key industrial activities of the Russian
economy. Russia ranks first in the world in nickel
production, second in aluminum production and
export after the US, and fourth in steel production
after China, Japan and the US.
According to official statistics, in 2005 the metal
industry accounted for over 16% of Russia's total
industrial production and around 10% of total foreign
investment.
In 2005, metal industry production increased by
2.2%, compared with 2004. The share
of investments in the fixed capital of metal
production was 5.4%.
Exports of metals and metal products increased
12.8% on the year to US$34.252 billion in 2005,
including exports of ferrous metals and products,
which rose 11.4% to US$20.948 billion. Exports
of non-ferrous metals and products rose 17.3%
to US$12.356 billion. An expanding domestic
demand for metal products on the part of machine
building and construction resulted in dynamic growth
in metallurgy.
In 2005, Russian ferrous metals companies
increased finished steel production by 1.6% to
54.575 million tons. The largest ferrous metals
holdings are Mechel Steel Group, Evrazholding,
Severstal Group, Magnitogorsk Iron & Steel Works
(MMK), Novolipetsk Ferrous Metal Factory (NLMK),
and Tube Metallurgical Company (TMK).
The non-ferrous sector is strongly export oriented:
up to 70% of the country's non-ferrous metal
production is exported. The largest non-ferrous
metals holdings are Russian Aluminium,
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Chapter 1. Doing Business
SUAL-Holding, UMMC, Norilsk Nickel, and
VSMPO-AVISMA.
The process of privatization and asset consolidation
in the metals industry is largely complete. Most
metallurgical companies are vertically-integrated
holdings, conducting exploration and extraction
as well as refining and sales activities.
Overall, relatively low production costs, proximity
to raw materials, an improving technological base
and increasing international integration are the key
positive features of the Russian metallurgical
industry.
Retail & Consumer
The increasing purchasing power of the population
is the main driver behind the dynamic growth in
recent years of Russia's retail and consumer sector.
The retail and consumer sector is one of the
fastest-growing markets in Russia and attracts 38%
of all foreign investment.
The retail industry's turnover in 2005 was around
US$240 billion. Russia is the fastest-growing retail
food sales market in the world, with the potential
to redouble in size by 2008. In 2005, Russia was
ranked the second most attractive retail market
in the Global Retail Development Index. Hence,
Russia has emerged as a big retail opportunity.
Major international chains are expanding their
presence in the food market, including Auchan,
Metro, Rewe and Ramstore. However, Russian retail
giants such as the Pyaterochka-Perekrestok,
Kopeika, Sedmoy Continent, and Magnit chains
continue to represent a significant share of the
market. In spite of the extensive growth of modern
retail chains, both Russian and international, street
markets and kiosks still account for almost
two-thirds of Russia's retail turnover. Their share of
the market is steadily declining, however.
Estimates of the volume of the consumer goods
market in Russia differ substantially. While
the Federal Service on State Statistics (Rosstat)
gives a figure of US$130 billion, independent
research agencies believe that the volume is much
higher, up to US$190 billion.
Around 40% of Russians' income is spent on food,
but income spent on household amenities, goods
and services, medicine and medical services,
recreation, education and cultural services
is increasing steadily.
Multinational companies are already either market
leaders or significant players in many segments
of the Russian consumer sector. The food and
beverages industry is dominated by companies such
as Danone, Sun Interbrew, Nestle, Pepsi and Coca-
Cola. Strong international players in the personal
care, cosmetics and household products markets
are Unilever, Procter & Gamble (including Gillette),
L'Oreal, Oriflame, Avon, Mary Kay and Henkel.
The main challenges faced by the retail and
consumer sector in Russia are a lack of space
in the major cities, poor logistics, insufficient
infrastructure, and bureaucracy. However, given
an increasing demand following the strong,
sustainable growth in personal disposable incomes
and intensifying competition in the market, some
of these problems should be overcome in the future.
Communications and IT
The Russian communications and information
technology sectors are developing rapidly and
represent 5% of the country's GDP. According
to the Ministry of Information Technologies and
Communications, revenues of the Russian
communications industry grew by 22%, reaching
US$23.17 billion in 2005.
By the end of 2005, mobile telephone penetration
exceeded 86%, compared with only 50% a year
before. In 2005, the total amount of mobile
subscribers was 130 million. Mobile penetration
is growing particularly fast in the regions, stimulated
by sharp competition among the three major
national operators (Mobile TeleSystems, Vimpelcom,
and Megafon). They are vying to buy up regional
operators and develop new networks across
the country. Russian mobile operators are actively
expanding in the CIS and Europe.
The most intensive annual growth was shown
by mobile communications, new generation services
and IP-telephony. IP-telephony operators' sales
reached US$260 million in 2005, which is a 53%
increase.
The fixed-line segment is dominated
by state-controlled Svyazinvest. Privatization of
Svyazinvest has already faced several delays.
The market for alternative operators is also
developing rapidly in Russia. Market leaders,
including Comstar United Telesystems, Peterstar,
and Golden Telecom, are growing fast and focusing
on high-margin corporate and high-income
household sectors.
The government has begun liberalizing
the long-distance market by granting alternative
operators licenses for international and inter-city
calls. The key emerging competitors to Rostelecom,
the former state monopoly, are Transtelecom, Golden
Telecom and MTT. This process of liberalization
is accompanied by a wholesale change in access
and interconnection rules.
National internet penetration rates are rather low,
with most estimates putting the rate somewhere
around 15%. In 2005, the number of internet users
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was 22 million people. Revenue from internet
services reached US$1 billion in 2005.
Hardware is the major IT segment, accounting
for more than 80% of the sector's revenue according
to official statistical data, and is growing rapidly.
The volume of hardware sales grew by 20%
and totaled US$6.5 billion in 2005.
The software industry is also on the rise, with a
growth rate of around 20% and sales reaching
US$1.2 billion in 2005.
In 2005, the Russian government initiated a pilot
program in IT-park creation. Parks are to be built
in Tyumen, Novossibirsk, Nizhniy Novgorod, Kaluga
and Kazan regions. The IT sector accounted for
5.3% of Russia's GDP in 2005. Despite positive
developments in the IT sector, software piracy
remains very high in Russia.
Financial Services
Securities
The Russian securities market is represented by two
major stock exchanges: the RTS Stock Exchange
and the MICEX Stock Exchange. Traditionally, RTS
accumulates shares trading, while MICEX
accumulates bonds trading.
More than 400 securities, including 70 bonds,
are listed on the RTS Stock Exchange. In 2005,
the total turnover on the exchange was US$57.7
billion. The RTS Stock Exchange also calculates
the RTS Index, actively used as an indicator for
the Russian securities market.
Daily trades on MICEX are held in stocks and bonds
of about 350 issuers. More than 550 professional
participants in the securities market trade on
the MICEX Stock Exchange. In 2005, the estimated
volume of transactions totaled US$226 billion,
including stocks transactions totaling US$142 billion.
Moreover, MICEX organizes foreign exchange
trading and is developing the derivatives market.
Banking
There are over 1,200 banks in Russia. State-owned
Sberbank has a significant competitive advantage
over other banks due to its size and extensive
branch network – about 1,000 branches throughout
the country. As a result, Sberbank dominates
the Russian banking sector with a market share
of 62% in deposits, 50% in retail lending, 32%
in commercial lending, and 29% in aggregate
assets.
The Russian banking sector is one of the fastest-
growing and most attractive segments
of the Russian economy. In 2005, the sector grew
even faster than the economy. The banks' total net
assets increased by 43% and totaled US$320
billion.
The sector is highly segmented. The top 24 banks
control 65% of assets. Over the past few years,
major Russian banks have attempted to reposition
themselves as retail banks. Banks currently offer
only a limited range of commercial and retail
products (compared to those in the EU and the US),
but new financial products are being introduced to
the market.
In January 2006, consumer loans reached US$38
billion and increased by 91% from 2004.
Insurance
According to results for 2005, the share of insurance
premiums in GDP was less than 3%.The reported
volume of the Russian insurance market was US$17
billion, an increase of 4% from 2004. The insurance
market portfolio is comprised of the following
segments: Property 37.83%, Liability 3.30%,
Obligatory Medical Insurance 28.68%, TPML 10.95,
Life Insurance 4.75%, Personal Lines 13.05% and
Other Obligatory Lines 1.44%.
As of 1 January 2006, there were 1,075 insurance
companies in Russia. Some of the top companies
are Rosgosstrakh, Ingosstrakh, RESO-Garantia,
Sogaz, and Rosno. The top 100 insurers controlled
83.5% of the market in 2005.
Throughout 2005, insurance companies developed
regional networks to reach customers in more
remote areas of Russia. As a result, insurance has
become popular not only in major centres, but
throughout the country.
Companies have to comply with international
standards to expand their operations beyond the
local and to the worldwide community. Foreign
customers prefer their insurers to possess a rating
that indicates the financial stability and solvency of
the enterprise. At present, seven companies in
Russia have international ratings such as those set
by Standard & Poor's and Fitch: Ingosstrakh (S&P
rating BB+), Moscow Re (S&P rating B+), Progress-
Garant (Fitch rating B-), Reso Re (S&P rating B+),
Neftepolis (S&P rating B+), Transsib Re (Fitch rating
B+), and Russian Insurance Center (Fitch rating B).
Mergers & Acquisitions
The year 2005 saw encouraging developments
in mergers and acquisitions (M&A): over 700 M&A
transactions were completed in Russia.
The Russian M&A market grew by 73%. Domestic
(72%) and inward (19%) transactions represent 91%
of the total deals closed. Most transactions were
made in the manufacturing, financial services and
energy and utilities sectors, the last accounting for
42% of the estimated total Russian market value.
The average size of private deal transactions
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in Russia was US$174.5million in 2005.
The oil and gas industry maintains a leading position
in terms of the volume of deals completed.
The largest deal in the history of M&A in Russia was
registered in October 2005: Gazprom's redemption
of 72.663% of the shares of Sibneft for US$13.09
billion.
In 2005, there was a sharp decrease in the volume
of deals in the transport and finance industries.
Russia had the highest proportion of domestic deals
among CIS countries in 2005, about 70% of the
total. In terms of the number of inward transactions,
Russia was the most attractive among CEE
countries with 137 transactions in total.
With 63 outbound deals closed in 2005, compared
to 26 in 2004, Russia remained active outbound
investor, targeting mainly Ukraine (with 14 deals),
but also neighboring countries such as Armenia,
Uzbekistan, Latvia and Azerbaijan and favored
European countries Germany, Austria, and Italy.
Russian companies set a precedent by
establishing outward transactions in such distant
locations as China, Australia, the UK
and the US.
Chapter 1. Doing Business
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Introduction
This section summarises for investors Russia's
general legal framework. Familiarization with these
basic principles of Russian law may save considerable
time and expenses later if a contemplated business
structure (which is a commonly accepted structure
in western countries) is not advisable or even possible
in Russia.
Types of Business Entities
Foreign investors can choose from a number
of different forms of business representation
in Russia, from Russian legal entities to representative
offices and branches of foreign legal entities. Russian
legal entities may be established in various forms,
including joint-stock companies, limited
liability companies and partnerships.
Representative offices of foreign entities are strictly
limited to conducting only liaison and support
functions. Branch offices are nowadays only allowed to
be involved in commercial activities, though they were
allowed a much broader range of activities in the past.
Many investors opt for branch offices at the outset
because these entities are able to engage in almost
any kind of commercial activity, are easier to establish
and are subject to less onerous reporting
requirements. At the same time, for many investments,
including joint ventures, production plants, licensing,
customs or privatisation issues, a Russian legal entity
may be better suited to an investor's needs.
Currently, the following forms of commercial legal
entities (for-profit) may be incorporated in Russia:� Full Partnerships;� Limited Partnerships ("kommandit" partnerships);� Limited Liability Companies;� Additional Liability Companies;� Production Co-operatives;� Joint-Stock Companies (Open and Closed);� Unitary Enterprises (State-owned legal entities not
available to foreign investors).
Of the above, only the joint-stock company resembles
a corporation, but the limited partnership and the
limited and additional liability companies also limit the
liabilities of investors to the extent described below.
Full Partnership
A full partnership is similar to the American general
partnership in which partners bear (full) joint and
several liability for the partnership's obligations.
A participant in a full partnership may not be a full
partner in any other partnership.
Limited Partnership
A limited partnership, which is closer to the European
kommandit partnership, has both full partners and
partners whose liability is limited to amounts equal to
their contributions. A full partner in a limited
partnership may not be a full partner in another
partnership and its liability is the same as for full
partners described above.
Partnerships under Russian law and for tax purposes
are generally regarded as separate legal entities and
are taxed accordingly. Contractual agreements for joint
activity do not have legal personality, and share some
of the characteristics of a tax transparent general
partnership, with special rules governing their tax
treatment.
Limited Liability Company
In this company, the liability of each participant
is limited to the value of its contribution. Each equity
holder in the limited liability company has the
right to withdraw from the company at any time
and to receive an amount equal to its pro rata share
of the net assets of the company, provided the
company is solvent. For foreign investors contributing
significant amounts of time and money to a joint
venture at the start-up phase, this aspect can be
worrisome. The minimum charter capital of a limited
liability company is 100 times the minimum
monthly wage*.
Additional Liability Company
In an additional liability company, a participant's
liability is limited to the value of its contribution
multiplied by a factor set forth in the company's
charter.
Chapter 2.
Legal Framework
*The term "minimum monthly wage" is used by the government as a ratio when calculating different payments, fines, penalties etc. and does not reflect the
real minimum wage. As of 1 January 2006 the minimum monthly wage (for calculating different payments, fines, penalties, etc.) was 100 roubles (i.e.,
approximately US$ 3.7).
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Chapter 2. Legal Framework
Production Co-operative
A production co-operative (or cartel) is deemed to be
a voluntary association of citizens united on the basis
of membership for joint production or other economic
activity, and through their personal labour and other
participation combining their property share
contributions.
Joint-Stock Company
Russian law provides that only joint-stock companies
may issue stocks which are regarded as securities
and subject to registration. Russian legislation defines
open and closed joint-stock companies, which are
broadly equivalent to public and private companies,
respectively. Public companies must make certain
financial and related information public each year.
The minimum charter (share) capital for open and
closed joint-stock companies is 1,000 and 100 times
the minimum monthly wage, respectively.
Formal Registration Requirements
The introduction on 1 January 2004 of a one-window
registration procedure for Russian legal entities has
not, in practice, proved sufficient to simplify the
process. The Moscow Registration Authorities have
even complicated the process of setting up a new
company in Russia by introducing on 1 January 2006
a new procedure for filing an application for the State
Registration application under which the CEO or
Director of a founding company has to file the
application for the state registration and receive the
registration certificates – no representation by proxy is
allowed. Such practice has been challenged, however,
by the Russian Supreme Court's recent decision
(Ruling №GKPI06-735 of 1 August 2006) to allow
application for state registration by proxy. As this ruling
has just recently been published, it remains to be
seen how it will be implemented in practice.
The new procedure has significantly increased the
time it takes to set up a company; if the CEO or
Director of the founding company can not personally
come to Russia to file the application, it must be sent
by registered (not express) mail to the Russian
registration authorities which will process the
application and return registration certificates
by regular mail either to the address of the founding
company or the local address of the entity being
incorporated.
It is obvious that under the above circumstances
the registration process may take several weeks or
even months to complete. There are no alternatives
available at the moment except for the personal filing
of the application by the CEO or Director
of the founding company, especially when time is
of the essence for investors.
Therefore, registration may be completed within 3-4
weeks through local tax authorities, who can handle
registration procedures provided the documents
are filed by the CEO or Director of the founding
company as described above. Shelf companies
are generally not available, and the incorporation
process can take from two to three months.
Preliminary approval from the Federal Anti-monopoly
Service or subsequent notification is required in
certain cases. State duty for registration of a Russian
legal entity as of 1 January 2006 is RR 2,000
(equivalent to approximately US$75). No processing
fee is charged for the registration of a Russian legal
entity.
Registration is also required for a branch or
representative office of a foreign legal entity (FLE).
However, in contrast to Russian legal entities,
the process of registering a branch or representative
office of an FLE involves various federal and local
authorities.
Registration of a branch or representative office
of an FLE generally includes the following steps:� Accreditation through federal and local bodies
(accreditation bodies). Accreditation is effectively
compulsory, since the local banks and
administrative authorities may not recognize the
branch/representative office without this form of
accreditation;� Tax registration;� Registration with State statistics authorities and
acquisition of statistical codes;� Registration with extra-budgetary (Pension and
Social Security) funds;� Opening bank accounts.
For the accreditation of a representative office,
accreditation bodies charge a processing fee ranging
from US$1,000 to US$2,500 depending on the period
of accreditation – from one year up to three years,
respectively. The state duty for branch accreditation as
of 1 January 2006 is RR 60,000 (approximately
US$2,200). In addition, accreditation bodies charge a
processing fee ranging from US$500 to US$2,000
depending on the period of accreditation – from one
year up to five years, respectively.
The registration and accreditation procedures
are rather complex but can normally be completed
within four to six weeks.
Tax Litigation
Tax disputes in Russia are heard by arbitrazh courts,
which are regular state courts having jurisdiction over
disputes related to business and economic activity,
including tax litigation. Such courts can be likened to
financial courts such as Germany's Finanzgericht and
the like.
The arbitrazh court system is divided into four
levels: first-instance arbitrazh courts, arbitrazh
appellate courts, courts of cassation and
the Supreme Arbitrazh Court (SAC) of the Russian
Federation.
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The first level is made up of the federal arbitrazh
courts of Russian federal constitutive entities;
altogether there are eighty-one first-instance arbitrazh
courts.
Arbitrazh appellate courts have jurisdiction over
several constituent entities of the Russian Federation;
altogether there are twenty arbitrazh appellate courts.
Arbitrazh appellate courts fully re-examine cases
whose first-instance court rulings have been appealed
but have not yet come into force.
Each of the ten federal district arbitrazh courts, which
form the third level of the system, functions as a court
of cassation with regard to a group of arbitrazh courts
making up one court circuit. These courts of cassation
check the legality of the decisions in force passed by
the first-instance arbitrazh courts and arbitrazh
appellate courts in their district.
The superior judicial body is the Supreme Arbitrazh
Court of the Russian Federation.
Very few cases are brought before the Supreme
Arbitrazh Court, which chooses at its own discretion
the cases it hears. It is also important to note that
while a general case may be decided at
any judicial stage, tax disputes always go through a
full court cycle of the first three court levels – and, less
often, the fourth – at the instigation of the tax
authorities.
On average, cases last from ten to twelve months,
from the moment of filing an application until the final
ruling of the arbitrazh court of cassation, but may take
eighteen months or longer due to the circumstances
and complexity of a particular case.
Non-regulatory acts (e.g., decisions, requests, etc.),
actions and omissions of the tax authorities can be
challenged in arbitrazh courts. The deadline for
making such a challenge is three months from
the moment the taxpayer becomes aware
of the violation.
Most tax disputes – up to 70% according
to non-official statistics – are related to export VAT
recovery, either set-off or refund.
Taxation
The present tax system is relatively new,
and many tax issues encountered in
longer-established systems have not yet arisen
or been resolved in Russia. Therefore, many
concepts familiar to Western business people and tax
specialists are not reflected in the tax legislation
and as such are not widely known in Russia.
As new concepts are introduced or discovered
by the Russian authorities, they are in some
cases applied differently than in the West.
Tax reform has been a major step in improving
the investment climate in Russia and has led to the
overall systematization and simplification of the laws
and tax administration. Tax reform introduced a 13%
flat rate for personal income tax, reduced corporate
tax from 35% to a uniform 24%, reduced VAT from
20% to 18% and introduced some other significant
changes. The last several years have seen the gradual
replacement of a variety of tax laws on separate taxes
with the equivalent Chapters in the Tax Code. The
introduction of the Tax Code eliminated loopholes and
concessions, liberalised business expense deduction,
and expanded and clarified many important definitions
and procedures. All this has made the Russian tax
system clearer to foreign investors.
The Tax Code does not contain many anti-evasion
provisions. A major development in this area was
the introduction of new transfer pricing rules (in effect
since 1 January 1999) and thin capitalization rules
(effective since 1 January 2002). The tax authorities
generally tended in the past to follow the form rather
than the substance of a transaction, which
encouraged aggressive tax evasion techniques. More
recently, however, they have shifted their attention to
the substance of a transaction when justifying it for
legal or tax purposes, and the concept of a 'bona fide'
taxpayer is currently being developed in Russia. Form
continues to be important, and documentary support
critical. The best recipe for success in such an
environment is to keep transactions simple, properly
documented and administered, be responsive to
change in all aspects of business operations, and
have strong tax and legal assistance.
Intellectual Property Rights
Russia is a party to all major international agreements
and conventions concerning intellectual property,
including: the Patent Cooperation Treaty, the Madrid
Agreement Concerning the International Registration
of Marks of 14 April 1891 and the Madrid Protocol of
28 June 1989 thereto, and the Nice Agreement
Concerning the International Classification of Goods
and Services for the Purposes of the Registration of
Marks.
Russian patent law regulates the legal protection and
use of inventions, utility models and industrial designs.
Its provisions correspond to international treaties on
the harmonization of patent legislation and the Patent
Cooperation Treaty, to which Russia is a party.
Therefore, many of its provisions are similar to those
in force in the majority of industrialized countries. In
Russia, an examination of merits is conducted to
confirm the patentability of an invention. Discoveries,
scientific theories and mathematical methods,
methods and rules of playing games and solutions
consisting only of the presentation of information do
not fall within the scope of Russian patent law.
Russian law grants exclusive rights to an original
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method, which are supplemented by the rights to a
product directly made using the patented method.
Under the Federal Law "Concerning Trademarks,
Service Marks and Appellations of Origin of Goods"
legal protection of a trademark is provided on the
basis of its official registration or under international
treaties or conventions to which Russia is a party,
including the Madrid Agreement Concerning the
International Registration of Marks of 14 April 1891
and the Madrid Protocol of 28 June 1989 thereto.
Russia is still in the process of implementing rules to
give formal recognition to famous or well-known
trademarks. It is a statutory obligation of the trademark
owner to actually use the trademark in its business
activities (i.e., the manufacture, export and sale of
goods bearing the trademark). If the trademark owner
fails to comply with this obligation, the trademark may
be prematurely deregistered by decision of the
Chamber of Patent Disputes under the respective
claim of an interested person or legal entity.
Protection is also provided to topologies of integrated
circuits, plant varieties, copyright and related rights.
Know-how is not considered intellectual property, but
confidential information under Russian legislation.
Company names are not the same as trademarks
in Russia and cannot be protected under Russian law.
Currently, Russian legislation only partially regulates
domain names and the procedure for registering and
assigning them.
According to Russian legislation, all intellectual
property rights may be transferred and/or granted
under either the assignment or the license agreement,
accordingly – which must be duly registered with the
Federal Service for Intellectual Property, Patents and
Trademarks of the Russian Federation in order to take
effect. Without a license agreement, the trademark
may be used with respect to goods bearing the
trademark that are put on the market by the trademark
owner or with his consent.
Distribution agreements granting rights to a whole set
of exclusive rights – including firm or trade name,
know-how and confidential information, trademarks,
etc.– should be registered with tax authorities and the
Federal Service for Intellectual Property, Patent and
Trademarks of the Russian Federation.
Privatization
The principal laws regulating the privatization process
in the Russian Federation are the Civil Code, the Law
on the Privatization of State and Municipal Property,
the Land Code, the Law on Land Code Enforcement
and various other laws dedicated to specific types of
assets subject to privatization. Of these laws, the
Privatization Program, defined in the Privatization Law,
is regarded as the key element of the government's
privatization policy. The Privatization Program sets
forth the priorities, restrictions and principles of the
privatization process. The Privatization Law requires
that the State Duma (Russian Parliament) approve an
annual privatization program submitted by the Russian
government.
Having already divested itself of nearly all of its large
property holdings, the Russian government now faces
the arduous task of unloading the lion's share of some
9,000 federal unitary enterprises and about 3,800
other companies owned by the state in full or in part,
while somehow managing the ever-increasing number
of state institutions. The plan is to keep only those
enterprises that are deemed strategically important or
that create products for public consumption. The
government is hoping to complete this process by
2008.
Recent Changes in Privatization Regulation
In accordance with the Land Code Enforcement Law,
buildings, premises and other structures, as well as
the land plots beneath them, shall be privatized
concurrently. However, if the owner of a building or
other structure acquired such property prior to the
Land Code's taking effect, the owner has the right to
acquire ownership of the underlying land plot or lease
it, except in cases where privatization is prohibited. As
of 1 July 2006, the concept of delimitation
of state-owned land between federal, regional and
municipal ownership levels has changed. Its legislative
refinement makes privatization of land more
transparent.
On 24 March 2005 the Plenum of the Supreme
Arbitrage Court of the Russian Federation ruled that if
the owner of a building or structure concludes a
contract to lease the underlying land after the Land
Code took effect, such owner is recognized to have
exercised its exclusive right of lease and forfeited its
right to purchase the land plot.
Subsoil Legislation
A great number of regulatory acts are presently in
effect in Russia that directly or indirectly apply to
subsoil use. The most important of these acts is the
Law on Subsoil , passed in 1992. Until a new subsoil
law is adopted, the Subsoil Law will continue to
regulate subsoil use. It applies to foreign as well as
Russian entities and individuals.
The Subsoil Law establishes the legal framework for
the use of subsoil, categories of subsoil use and the
grounds for creating or terminating subsoil use rights.
It also briefly describes the scope of a license for
subsoil use and the core rights and obligations of
subsoil users, as well as the mechanism of
governmental regulation of subsoil use, and liability for
non-compliance with the Law.
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To implement the Subsoil Law, governmental agencies
(including subsoil use licensing agencies) have
adopted a large number of regulatory acts.
Under the Subsoil Law and in accordance with
general practice, a subsoil user must comply not only
with the provisions of the Subsoil Law and associated
regulations, but also fulfil the requirements of other
legal and regulatory acts (on the environment,
industrial safety, labour and tax legislation). Thus,
other branches of law also directly affect the subsoil
use process.
In addition:� Many provisions of the Subsoil Law are of a generic
nature, unclear, or ambiguous;� The Subsoil Law and regulations adopted
to implement it have numerous gaps and fail to
address some aspects of relations between the state
and the subsoil user; � Many aspects of relations between the subsoil user
and the state are based on existing practice rather
than on regulatory acts.
The administrative nature of relations in subsoil use in
the Russian Federation means that there is no peer
partnership between the state and the subsoil user;
rather, they represent a superior and a subordinate
party.
Some investors have the misconception that
in the area of subsoil use the state and the subsoil
user are on the level of partners. This misconception
is due to the fact that a subsoil use license includes a
license agreement that is signed by the licensing
agency and the subsoil user when the license
s issued. However, even though this document
is called a license "agreement", implying a civil
contract, it is an administrative act that dictates the
conditions of the license and the obligations of the
subsoil user.
It is important to note that:� The licensing agency takes decisions on the
termination, suspension, or restriction of a license
independently and without having to obtain a court
order;� The right to use subsoil cannot be freely transferred
or used as collateral;� The fact that a subsoil user received a license for
geological exploration of subsoil, prospecting and
discovery of a subsoil deposit does not guarantee
that it will receive a license for production of the
same subsoil area, since the Subsoil Law does not
provide for mandatory issuance of a license in such
circumstances.
The Subsoil Law does not restrict foreign entities
from directly or indirectly holding subsoil rights.
Despite the absence of any legal basis for
discrimination, however, in practice very few foreign
entities have directly received a license from the
licensing authorities.
New Russian Subsoil Legislation
A draft Subsoil Law developed by the Ministry for
Natural Resources (MNR) was approved by the
government in March 2005 and submitted to
the State Duma the following month. The draft was
examined in the first reading in October 2005 and
then returned to the government in November 2005
for further development and amendment. At the
moment, the status of the draft Subsoil Law is quite
unclear.
The new Subsoil Law:� Introduces a contractual system for relationships
between the state and the subsoil user. Contracts
shall be governed, in general, by civil legislation.
Licenses issued before the introduction of the new
Subsoil Law shall remain in force but licensees will
be entitled to change them to contracts.� Recognizes subsoil use rights as property rights
which can be transferred, pledged, etc.� Entitles companies holding exploration rights to
receive production rights if they make a commercial
discovery (it is not applicable to foreign investors
who discover strategic fields).� Provides that a subsoil use contract can be
terminated by a court order only (but the licensing
authorities will still be able to terminate a license
without a court order and in certain cases the
contract can be terminated by the state unilaterally
and out of court).� Limits grounds for the termination of subsoil use
rights.� Makes no guarantees of the renewal or extension of
the subsoil use right.
While the new Subsoil Law improves the business
environment in the subsoil sector in some ways, it also
places a number of potentially onerous demands on
foreign investors, which should be dealt with carefully.
For instance, it does not allow foreign companies to
obtain subsoil use rights and provides that the
government introduce bidding restrictions on
companies with foreign participation in certain
auctions. Furthermore, any disputes that arise shall be
resolved in Russian court proceedings only. The
license regime, while significantly restructured,
remains in place and requires new implementing
regulations. It is yet unclear how the new system of
civil subsoil use contracts will work in practice.
Real Estate
This section provides a general overview of Russian
real estate law.
General Provisions of Russian Law
Russian law permits private ownership of land and
other real property. The Constitution, together with the
Civil Code, Land Code and other laws, uphold and
protect the right to own private property. Currently,
most land is not privately owned, but is still held by the
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Russian Federation, Russian regions and
municipalities.
The rights to real property such as ownership, lease
and servitudes (easements) have to be recorded in
the State Register of Rights to Real Property and
Transactions Therewith, as explained below.
Russian law provides that significant technical and
legal information about land plots, such as their
measurements and boundaries, must be recorded in a
state land cadastre.
All land is categorized on the basis of its permitted
use into one of the following land categories:
agricultural land; settlement land; land for use by
industrial enterprises, power companies,
transportation companies and communication
companies; security zones; forestry land; waterfront
land; or reserved land (i.e., land which is owned by
the state or municipality and is subject to
reclassification into one of the other land categories).
Land must be used in accordance with its category
and, to the extent that urban construction regulations
apply, in accordance with zoning requirements.
The main principles for changing the category of a
given plot of land are set forth in the Land Code. The
Federal Law "On Reclassification of Land and Land
Plots from One Category to Another" of December
2004 regulates the procedure for such reclassification
in more detail.
Under the Land Code, state and municipally-owned
land plots may be sold or leased to Russian and
foreign persons or legal entities. However, Russian law
bans the sale or lease of certain types of land, the
most common examples of which are nature reserves
and land used for military purposes.
Some land plots that may not be transferred to private
ownership may nevertheless be leased, such as
forestry land and nature reserve land. In general,
Russian law neither imposes major restrictions on
foreigners nor makes distinctions between
foreigners/Russian legal entities with foreign interests
and Russian legal entities/citizens in relation to the
ownership of land – except for agricultural land, land
located at the Russian border, and certain other
territories yet to be specified.
Agricultural land plots have high priority and are
subject to special protection. Regions of the Russian
Federation and, in some instances, municipal
authorities have the right of pre-emptive purchase of
agricultural land plots offered for sale, except where
the land is offered for sale through public auction.
To use land in the agricultural category for a purpose
other than agricultural production, a landholder must
first have the land reclassified in accordance with its
proposed intended use. The main principle of the
reclassification of land from the agricultural category to
another is that only land which cannot be used for
agricultural purposes can be reclassified.
The Land Code calls, in principle, for a unified
approach to land and the facilities located on it. At the
present time, however, land and facilities located on it
are treated as separate legal interests under Russian
law as it is still possible for them to be owned by
different persons – even though a building and the
underlying land cannot be sold separately if they are
owned by the same person.
Obtaining Land Plots for Construction Purposes
Russians and foreigners may acquire land held by
the state or municipalities for development and
construction. The Land Code allows the state or
municipal authorities to refuse to grant land if the land
in question may not be alienated or privatised, if the
land is reserved for state or municipal needs, and in
some other cases specifically stated in the law.
There are two principal procedures which must be
complied with in order to grant state or municipality-
owned land for construction purposes. These
procedures are known as "granting land with prior
approval for the location of the construction" and
"granting land without prior approval for the location of
the construction".
Construction on an allocated land plot may only be
carried out after obtaining a construction permit.
A construction permit is granted to the landholder –
the owner or tenant of the land plot.
Obtaining a construction permit is a multi-stage
process. It involves approvals and registrations of the
project documentation by a number of governmental
bodies, including architectural and urban development
agencies, environmental management and protection
agencies, and governmental bodies for public health
supervision.
State Registration of Rights to Real Property and
Transactions Therewith
The rights to real property (including land plots and
buildings) and certain transactions therewith are
subject to state registration in the Unified State
Register of Rights to Real Property and Transactions
Therewith as provided by the Civil Code and Federal
Law "On State Registration of Rights to Real Property
and Transactions Therewith".
Registration is required for the right of ownership
to newly-erected buildings and facilities, the right
of ownership to land plots, the disposal of real
property pursuant to a trust, servitudes (easements),
sale and purchase agreements of real property,
mortgage agreements, and land plot and building
lease agreements concluded for a term of at least one
year. Such rights to real property only arise at the time
of their state registration. Rights to real property
and transactions therewith are registered by the
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regional branches of the Federal Registration Service
at the location of the real property.
In the event of failure to register a transaction with real
property that requires state registration within the
prescribed period of time, the transaction is deemed
unconcluded or, in certain instances, null and void.
Any transaction involving real property rights must be
registered.
Urban Construction Code
The new Urban Construction Code adopted
on 29 December 2004 introduces clearer
and more transparent regulations governing the
issuance of construction permits and permits for
putting facilities into operation, although it remains to
be seen how this legislation will be implemented in
practice. As a general rule, a permit is issued for the
period of the construction stated in the project
documentation, but it may be extended.
The new Urban Construction Code has also
introduced a more definite procedure for
commissioning a completed facility, although
numerous implementation rules have yet to be
adopted. Under the new procedure, upon completion
of the construction, the landholder has to obtain a
commissioning permit which certifies that the
completed construction conforms to the project design
documentation and statutory rules.
To file an application for obtaining a commissioning
permit, the landholder has to prepare certain
statements and acquire, among others, approvals of
the state construction supervision and state fire safety
authorities (unless the type of facility concerned does
not require these kinds of supervision).
When such a commissioning permit is granted,
the rights to the completed building may require state
registration.
After registering the rights to the facility constructed on
the leased land plot, the owner of such real property
obtains the exclusive right to acquire the title to such
land plot or to obtain it on a long-term lease. As a
general rule, the lease term applicable to state-owned
land plots cannot exceed 49 years.
Construction of Residential Property
Prior to the adoption of the Federal Law "On
Participation in Construction of Multi-Apartment
Houses and Other Real Property and On Amending
Certain Legislative Acts of the Russian Federation" of
30 December 2004 ("Law on Shared Participation in
Construction"), construction funded or managed by
multiple parties was regulated by the Russian Civil
Code and other laws. The Law on Shared Participation
in Construction created a more comprehensive and
explicit legal basis for individuals and legal entities to
invest money in the joint construction of multi-
apartment houses or other types of real estate.
Despite the legal go-ahead on this key point, the Law
on Shared Participation in Construction does not
present an unambiguously market-friendly framework
for multi-party real estate investments. A number of its
provisions have not been tested in practice, others are
unclear or contradictory, and some call for urgent
amendment as they are onerous to developers and
financing banks and so prevent market growth. For
that reason, most of the players (developers) tend not
to use the regulatory framework introduced by the law,
making the market less transparent.
In response to numerous requests from the
construction industry to make this strongly pro-
consumer law less burdensome for developers, the
lawmakers are now considering amending the Federal
Law "On Participation in Construction of Multi-
Apartment Houses and Other Real Property" to make
the law less stringent for developers and the market
more transparent.
Mergers & Acquisitions
In Russia, the term "acquisition" is understood to
mean a transaction where one party gains control over
the other. A "merger" is defined as a type of corporate
reorganization where one company ceases to exist
and transfers all its assets and liabilities to another
company by means of legal succession. Mergers are
mainly used for intra-group restructuring.
The most common options for acquisition of a
business of a Russian company:� Acquisition of shares (either existing or newly issued
shares);� Acquisition of assets.
Though Russian law recognises acquisitions of
businesses, they are very rare on the Russian market.
Foreign Ownership Restrictions
Ownership of Shares
Generally, a foreign company is permitted to own
100% of a Russian company. Russia has a few
sectors in which foreign ownership is limited: banking,
insurance, military production and supplies, media,
space exploration, aviation and agriculture. Currently,
the authorities are considering introducing limitations
in the oil and gas sector.
Ownership of Assets
Except for a limited number of restrictions, a foreign
company may own or lease buildings, structures, land
plots (except for agricultural land) and other assets,
including intangible assets such as patents and
trademarks.
Acquisition of Shares: Issues to Consider
Title to Shares
A buyer should make sure that: the seller holds the
title to the shares; the shares have been duly
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authorised, validly and properly issued and distributed
in accordance with all Russian laws and the
foundation documents (this issue is the most critical
for a privatized acquiring company); the shares are
fully paid; and the seller has received all necessary
corporate approvals.
When acquiring newly issued shares, a subscriber
should monitor the process of share issuance,
including share registration with the Federal Service
for Financial Markets.
Corporate Law Requirements
If a buyer (together with its affiliates) acquires
more than 30% of voting shares in an open
joint-stock company, the buyer must make a public
offer to the remaining shareholders of the company
to acquire their ordinary shares at the fair market
value. If, as a result of such acquisition,
the buyer (together with its affiliates) purchases
more than 95% of the company's voting shares,
the buyer must, at the request of the remaining
shareholders of the company, purchase
their shares in the company at the fair market
value.
Anti-trust Approval
In accordance with Article 18 of the Law
on Competition and Restriction of Monopoly
Activity on Commodity Markets, prior anti-trust
approval is required when more than 20%
of ordinary shares in the company are acquired
and the combined book value of the acquirer
(its affiliates) and the target company exceeds
RR 3 billion.
Registration of Shares Transfer
Transactions with shares of a joint-stock company
require registration in the shareholders' register in
order to ensure their transfer. The register can be
maintained either by the company or professional
registrar. Registration of transfer usually takes from
one to three days.
Transactions with participatory shares of a limited
liability company require amending the foundation
documents of the company and subsequent state
registration. This procedure may take from seven to
ten days.
Acquisition of Assets: Issues to Consider
Title to Assets
A buyer should perform thorough due diligence
on the seller's title to target assets, especially
when such assets were privatized in the past.
This should not be limited to a search of real
property registers, patents and trade marks, but
should be extended to a review of supporting
documents: agreements, acts of acceptance,
permissions etc.
A buyer's solicitor should also conduct a careful
review of encumbrances associated with the target
assets being acquired.
Anti-trust Approval
Prior anti-trust approval is required when assets
for purchase comprise more than 10% of the book
value of all the seller's fixed and intangible assets
and the combined book value of the assets of the
acquirer, its affiliates and the seller exceeds RR 3
billion.
Registration of Transactions with Real Property
Transactions with real property (acquisition, lease,
mortgage and others), patents and trade marks
require state registration. It normally takes twenty to
thirty days for the registration of a transaction and
subsequent transfer of rights to assets.
Capital markets
General
The capital market and transactions with securities
transactions within the Russian Federation are
primarily regulated by the Federal Law "On the
Securities Market" ("the Securities Law") of 22 April
1996 and the Federal Law "On Protection of Investors'
Rights and Interests on Financial Markets" of 5 March
1999. The offering of corporate securities is regulated
by the Federal Law "On Joint Stock Companies" and
by a number of regulations issued by the Federal
Service for Financial Markets ("the FSFM") – a
Russian securities market watchdog.
Securities in Russia
Under Russian law, an instrument may not be
considered security unless it is specifically
recognized as such in the Russian Civil Code or
other relevant laws. The Civil Code recognizes shares,
bonds, promissory notes, cheques, deposit
and saving certificates, bills of lading and options
on shares.
Most corporate securities should be registered with
FSFM before their placement and allotment.
Registration of issue usually takes approximately thirty
days and requires disclosure and filing of certain
information and documents with FSFM.
In a limited number of cases, the Securities Law
requires the issuer to register a prospectus of an
issue. Companies that have at any time registered a
prospectus are subject to capital markets disclosure
requirements.
Fundraising
A Russian company may raise funds through the
issue of equity or debt securities. Equity securities
may be offered to the general public only by open
(public) joint-stock companies. Shares of closed joint-
stock companies and limited liability companies may
not be offered to the general public.
In 2006, the procedure of public offering of shares
on Russian stock exchanges was simplified and new
amendments to the legislation were aimed at bringing
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public offering rules in line with international standards.
Under the new rules, the number of shares to be
floated on foreign exchanges was capped at 35% of
the overall issued shares in the company.
The issuance and trading of bonds is governed by
the Securities Law, which distinguishes between
secured and unsecured bonds. Secured bonds must
be fully secured with a third-party guarantee or
suretyship, or with a pledge (or mortgage) over the
issuer's and/or third party's securities or immovable
property. Only companies which have existed for a
minimum of two years may issue unsecured bonds.
The issue of bonds should be registered with FSFM.
Russian joint-stock companies may also issue bonds
convertible into shares. Together with bonds, Russian
companies make extensive use of promissory notes
for debt financing. The Russian Federation is a party to
the Convention Providing a Uniform Law for Bills of
Exchange and Promissory Notes.
Licenses
Certain activities requiring special expertise may be
carried out by either a legal entity or a licensed
individual.
Nowadays, a wide range of business activities in such
areas as finance, banking and investment services,
building and construction, the handling of hazardous
wastes, pharmacy, education, weapons production,
energy and mining, transportation and others are
subject to various licensing requirements.
The basic legal framework for licensing is set forth by
the Federal Law of the Russian Federation of 8 August
2001 "On Licensing of Several Activities". This act
provides a list of activities to be licensed as well as
general guidelines for licensing procedures. It is worth
mentioning that licensing in such industries as, for
instance, alcohol production and trade,
telecommunications and cryptography, banking, and
international road transport is governed by other laws
and regulations.
At the moment, licences are granted by a number of
different state bodies and agencies responsible for
specific industries or businesses.
As a rule, licences are granted for a term of not less
than five years, which may subsequently be extended.
In the event of violation of the licence requirements,
the licence can be cancelled or revoked by decision of
the licensing bodies or by court ruling. Carrying on
business activities subject to licensing without the
proper permission or licence may result in
administrative or even criminal liability under
Russian law.
Russian law has made provisions for the eventual
abolishment of an extensive number of licences.
Licensing requirements for travel agency services as
well as structural engineering survey and construction
are slated for cancellation on 1 January 2007.
Licensing requirements for certain other activities will
be withdrawn as soon as the government bodies
regulating them adopt more detailed regulations to set
out strict operating standards. Unfortunately, Russian
law does not provide any deadlines for adopting these
regulations, and so it is hard to predict when each
particular licensing requirement will be abolished. For
example, regulations on the maintenance of medical
equipment and its production were expected to come
into force in the summer of 2006, but up to the present
moment these regulations have not been enacted and
the licensing requirement remains in force.
Currency regulations
Federal Law No. 173-FZ "On Currency Regulation and
Currency Control" ("the Currency Law") establishes
rules for performing currency operations in the Russian
Federation.
Under the Currency Law, currency transactions include
transactions involving currency valuables (i.e., foreign
currency and foreign currency securities)
and transactions between residents and non
residents involving roubles and domestic securities.
All currency transactions may be classified into three
major groups:
� Currency transactions between residents and
non-residents;� Currency transactions between residents in Russia
with currency valuables;� Currency transactions between non-residents in
Russia.
Currency transactions between residents and non-residents
On 1 July 2006, it became much easier to perform
currency transactions between residents
and non-residents.
Until then, certain currency transactions
between residents and non-residents (e.g., loan
transactions, transactions with Russian
or non-Russian securities, etc.) were restricted,
required the use of special bank accounts and were
subject to reservation requirements.
The above restrictions have been abolished
by the Central Bank of Russia and the Government of
the Russian Federation. The respective amendments
in currency legislation are aimed at liberalizing the
currency market and simplifying the process of
transactions between Russian residents and their
foreign counterparts.
Currency transactions between residents
Currency transactions between residents are
prohibited, except for certain transactions specified by
the Currency Law. Specifically, the following types of
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Chapter 2. Legal Framework
currency transactions may be performed freely
between residents:� Transactions between agents (commission agents)
and principals (commission principals) where the
agents render services that involve the conclusion
and performance of contracts with non-residents for
the transfer of goods, the performance of work or
services, or the transfer of information or intellectual
property;� Transactions between a resident and an authorized
bank involving the receipt and repayment of loans,
or the payment of interest or penalties under
respective contracts;� Transactions relating to mandatory payments (e.g.,
taxes, fees and other such payments) in foreign
currency to the federal budget, a budget of the
constituent entities of the Russian Federation, or a
local budget, as required by Russian legislation;� Transactions involving a resident's acquisition of
promissory notes from an authorized bank issued by
this or another authorized bank, the presentation of
such notes for payment, the receipt of payment for
such notes, or a resident's alienation of such
promissory notes to an authorized bank.
Currency transactions between non-residents in Russia
Transactions between non-residents in foreign
currency are free from restrictions.
Non-residents may freely carry out among themselves
transactions involving Russian domestic securities in
the territory of the Russian Federation. The only
potential restriction is that the Russian Central Bank
may require non-residents to use special accounts, but
so far this has not been introduced.
Accounts of residents opened with foreign banks
Residents have a right to open without restriction
accounts in foreign currency with banks located in
foreign states that are members of the OECD or the
Financial Action Task Force on Money Laundering
(FATF). Residents must notify tax authorities of the
opening of accounts abroad.
A resident legal entity and a resident individual may
also open foreign accounts in countries that are not
members of OECD or FATF, which requires advance
registration of the account with Russian tax authorities.
The above requirement is effective until 1 January
2007, when residents will be allowed to open without
advance registration bank accounts in any foreign
bank, and will only be required to notify tax authorities
upon opening the accounts.
Regulatory Structures for the RussianFinancial Sector Securities Market
The Federal Financial Markets Service, or FFMS
(formerly the Federal Commission for the Securities
Market), is the federal executive body that controls and
supervises activity in the financial markets, including
stock exchange activity, and issues the relevant
regulations. It also regulates the investment of pension
savings.
The main objectives of FFMS are to maintain stability
in the financial markets, make the markets more
efficient and attractive to investors, reduce investment
risks, and increase market transparency.
The FFMS performs the following tasks:� Regulate the issuance and trading of securities, as
well as state registration of security issues, and
report on the results of security issues;� Register security prospectuses;� Control and supervise the activities of issuers and
professional market participants;� Promote public understanding of the laws and their
practical application;� Synthesize the practice of legislation use and make
proposals to the federal government to improve
existing laws and develop draft laws and other
regulations;� Organize analysis of issues relating to
the development of the financial markets;� Maintain information disclosure in concordance with
Russian legislation.
The FFMS has fourteen regional divisions: in Moscow,
St. Petersburg, Yekaterinburg, Novosibirsk,
Nizhni Novgorod, Rostov, Vladivostok, Oryol,
Krasnoyarsk, Omsk, Chelyabinsk, Samara, Saratov,
and Irkutsk.
The main federal laws regulating the activities of
issuers are Law No. 208-FZ of 26 December 1995
"On Joint-Stock Companies"; Law No. 39-FZ of April
22 1996 "On the Securities Market"; and Law No.
14-FZ of 8 February 1998 "On Limited Liability
Companies". Additionally, FFMS has issued many
regulations for all securities market participants.
Banking and Finance
The operations of commercial banks are regulated by
the Civil Code; the Federal Law "On Banks and
Banking Activities" of 2 December 1990; and Central
Bank of Russia (CBR) regulations. Banks are issued
different types of licenses which permit them to carry
out a range of banking activities depending on the
type of license held. Typical services offered by
commercial banks include lending, settlement
operations, foreign exchange operations, trade finance,
and operations with securities, including bonds,
shares, and bills of exchange.
In December 2003, the Federal Law "On Insurance of
Bank Deposits of Individuals" was adopted. The law
stipulates the legal, financial, and organizational
framework for mandatory insurance of bank deposits
of individuals; the powers, procedure for
establishment, and operation of deposit insurance
institutions; and the procedure for deposit
compensation payments.
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Since 1 October 2004, all Russian banks have been
preparing their financial statements in IFRS format
in addition to using Russian statutory reporting forms.
In December 2004, the government passed the new
Federal Law "On Credit Histories." The main
objectives of this law are to decrease credit risks,
improve timeliness of fulfillment of engagements by
borrowers, and increase the efficiency of credit
organization activity by creating credit bureaus.
Central Bank of Russia
The main law for the banking system is the Federal
Law "On the Central Bank of Russia" of July 2002,
which declared the CBR a legal entity and the main
bank of Russia. The law specified the functions of
the bank in organizing money circulation, monetary
regulation, foreign economic activity, and regulation of
the activities of joint-stock and cooperative banks.
The CBR enjoys independent status.
The structure of the CBR includes 59 central
administrative boards, 19 national banks and 924
calculation cash centers.
The chairman of the CBR is nominated by the
President of the Russian Federation and approved by
the parliament. The new law has extended the scope
of the State Duma's control over the bank.
The CBR owns a controlling stake in Sberbank,
also used to implement monetary policy, and in a
number of foreign institutions, including Ost-West
Handelsbank in Frankfurt. CBR also owns stakes in
Intergovernmental Bank (Moscow), Moscow Interbank
Currency Exchange and the National Depository
Center.
In April 2005, CBR and the Russian government
adopted the Banking Sector Development Strategy for
the period to 2008. The document was set as the main
objective during that period.
The main goals in the development of the banking
sector are as follows:� Increase the effectiveness of the banking sector's
activity in attracting household and enterprise sector
funds;� Enhance the competitive ability of Russian credit
institutions;� Increase the protection of interests of depositors and
creditors of banks;� Develop a competitive environment and maintain
the transparency of credit institutions;� Prevent dishonest commercial practices and illegal
activities in the banking sector;� Strengthen investor, creditor, and depositor
confidence in the Russian banking sector
Insurance
The main body for insurance regulation is the Federal
Service for Insurance Supervision of the Ministry of
Finance. It is a federal body of executive power that
performs the role of supervisor in the field of insurance
activities.
The main functions of the Federal Service
for Insurance Supervision are as follows:� Making decisions about the issue or denial of
licenses and about the cancellation, limitation,
suspension, recovery of operation, or withdrawal of
licenses;� Issuing and withdrawing the certificate of
competence;� Compiling a common state register of an insurance
company's employees;� Monitoring observance of insurance legislation;� Receiving, adapting, and analyzing accounting,
which is provided by the employees of an insurance
company;� Issuing instructions to the employees of an
insurance company on the exposure of a breach of
the insurance legislation.
The Federal Service for Insurance Supervision has
territorial branches in all seven federal districts.
The Federal Law "On Insurance" of 27 November
1992 establishes the legal framework for insurance
transactions between buyers and sellers of insurance.
In addition, the law allows the use of insurance
intermediaries, sets accounting and solvency rules for
insurance companies, and establishes a supervisory
authority.
Chapter 48 of the Civil Code, which is devoted to
insurance issues, reinforces the Law "On Insurance"
on a number of matters, but there are some areas
where the two conflict. Since Chapter 48 contains
some all-inclusive but nonspecific principles
concerning licensing, supervision, and nonspecific
deregulation, it will continue to act as a brake on the
progress of reform efforts until appropriate
amendments to the Civil Code are enacted.
In January 2004, "On Insurance" was enacted,
which significantly tightened the rules, including
imposing requirements for charter capital of newly
created insurance companies of between US$1 million
and US$4 million depending on the type of license
(non-life insurance, life insurance or reinsurance
license).
The Federal Law "On Mandatory Third-Party Auto
Insurance" took effect in July 2003.
With this law on the books, insurance companies
collected US$1.8 billion in insurance premiums in
2005.
In July 2005, new amendments to the Federal Law
"On Mandatory Third-Party Auto Insurance" were
adopted. Changes in legislation aim for recovery of
damage to insured persons even in the event of
bankruptcy or withdrawal of the license of the
insurance company.
20
Accounting Principles and Practices
Investor Considerations
� Russian Accounting Rules (RAR) are not yet in line
with International Financial Reporting Standards
(IFRS, previously known as International Accounting
Standards), although Russian accounting reforms
based on IFRS have been introduced.� Inflation accounting is underdeveloped.� Consolidated financial statements are treated as
secondary to the stand-alone statutory financial
statements of a company and are often not
prepared.� The accounting profession is still in the formation stage.
Accounting and Its Regulation
One of the major differences between Russian
accounting and international practice lies in the
understanding of the term "accounting" itself. In
Russia, the term has a primary meaning of
bookkeeping and a secondary connotation of financial
reporting. Therefore, Russian Accounting Rules give
extensive coverage to bookkeeping procedures, rather
than financial reporting rules.
Accounting in Russia is regulated by state authorities.
The regulatory framework for Russian accounting has
three levels. The first level includes the Federal Law
"On Accounting," the Civil Code, the Federal Law "On
Joint-Stock Companies", etc. The second level of the
regulatory framework consists of Russian Accounting
Standards, the Chart of Accounts and other
accounting regulations. The Central Bank of Russia is
responsible for setting standards for banks and other
credit institutions, while the Ministry of Finance
performs this function for all other companies. The
accounting policies of a given company are developed
based on the legislation and regulations of the first two
levels. Each company keeps its accounting books and
prepares its financial statements in accordance with its
approved accounting policies.
Although accounting procedures are gradually becoming
more harmonized with IFRS, there is still a long way to
go. Some significant differences continue to exist and in
some cases there are no specific Russian Accounting
Rules (RAR) that cover certain areas. For example, there
are no rules for accounting for the impairment of some
assets. Nor is there a specific rule for business
combinations. The main differences between national
accounting rules and IFRS are presented in Appendix 1
below.
Accounting Principles and Practices
Russian accounting practice has already moved a long
way from the central-planning model towards
a market-economy model and, consequently, towards
international accounting practice.
In 1998, the Russian Government adopted a Programme
for Reform of Russian Accounting in Accordance with
IFRS. In line with this programme, new Russian
Accounting Standards (RAS) are being introduced. These
standards regulate major aspects of accounting, as well
as the presentation and disclosure of information (such
as accounting policies, fixed assets, intangible assets,
inventories, income and expenses, related parties,
segment information, government grants and others). The
new RAS have introduced fundamental accounting
assumptions and requirements, such as going concern,
consistency of accounting policies, accrual basis,
prudence, substance over form, cost-effectiveness and
others, thus bringing Russian practice closer to
international practice. Practical interpretation of the
requirements and assumptions under RAR may be
different from IFRS (e.g., RAR are often form-driven).
Form and Content of Statutory FinancialStatements
The only financial statements acceptable for filing
purposes are statutory financial statements.
The structure, presentation, procedures for preparation
and other aspects of statutory financial statements
are stipulated in the Russian Accounting Standard
"Financial Statements of a Company". Statements
should be prepared in Russian roubles and
in the Russian language, and a company must submit
its annual statutory financial statements to:� The stockholders of a legal entity in accordance with
its foundation documents;� The state statistics authorities;� The state tax authorities.
Basic annual statutory financial statements include:
a balance sheet, a profit and loss account, and notes
to both (for example, the cash flow statement and the
Chapter 3.
Accounting and Audit
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statement on changes in equity constitute a part
of the notes).
For qualifying small businesses, a simplified set
of accounting rules is allowed.
The reporting year of a Russian company
is the calendar year.
Chart of Accounts
The main categories of the Chart of Accounts are
shown in the Table below.
The Chart of Accounts must be applied in the
Russian Federation by all commercial companies
(except banks and state-financed companies) using
double-entry accounting.
Main Categories in the Chart of Accounts
Account Category number
Non-current assets 01-09
Inventories 10-19
Costs of production and work-in-progress 20-39
Finished goods and goods for resale 40-49
Cash and investments 50-59
Accounts receivable and payable 60-79
Equity 80-89
Financial results 90-99
Off-balance sheet accounts 001-011
Some Important Aspects
Balance Sheet
On the face of the balance sheet, all assets and
liabilities should be classified into current and
non-current depending on their maturity date.
Assets and liabilities should be classified as current
if their maturity date is within twelve months of the
balance sheet date or within the operating cycle if
the latter exceeds twelve months. All other assets
and liabilities should be classified as non-current.
Receivables
Provisions for trade receivables that have not been
settled on the due date and are not secured by
appropriate guarantees (under Russian legislation
such receivables are classified as doubtful) are
created at the reporting year-end. In the balance
sheet receivables are shown net of the provision.
Inventories
Inventories are initially recognised at cost. The cost
of inventories (by type) can be assigned by using
different cost formulas in the event they are
transferred for production or otherwise are disposed
of. The following cost formulas are allowed: specific
identification; average cost; first-in, first-out (FIFO);
or last-in, first-out (LIFO). Finished goods are valued
at actual cost, standard cost or direct costs. Work in
progress can be valued at standard cost, direct
costs, cost of raw materials and semi-finished
goods, or actual cost (for unique production only).
For reporting purposes, inventories should be
measured at the lower of cost and net realizable
value if (1) the price of inventory decreased during
the reporting year, or (2) if inventory became
obsolete or partially damaged. Provisions for
impairment of inventories are created at the
reporting year-end. In the balance sheet, inventories
are shown net of the provision.
Investments
Investments should be initially recorded at the cost
incurred by the investor, including amounts paid to a
seller under a contract, fees paid to intermediaries
in relation to an acquisition and other similar items.
Short-term foreign currency securities are shown at
the exchange rate of the given foreign currency in
terms of RR established by the Central Bank of
Russia as of the balance sheet date. Long-term
foreign currency securities are not revalued.
Investments in publicly listed stocks should be
revalued at their market value on a regular basis. A
provision is created at the reporting year-end for
financial investments in non-listed stocks if they are
steadily declining.
Property, Plant and Equipment
Property, plant and equipment shall be recognized
at historical cost. To offset to a certain extent the
effect of inflation on the fixed-asset base, a
company has the right to perform the revaluation of
the historical value of fixed assets and accumulated
depreciation once per year (at the beginning of the
year) or less often, but still on a regular basis.
The depreciation of fixed-asset items may be carried
out by one of the following methods: the straight-
line; diminishing balance; sum-of-the-years-digit;
or sum-of-the-units. The useful life is determined
by a company according to its accounting policy.
Intangible Assets
The categories of intangible assets are defined
by the relevant accounting standard. Amortization of
an intangible asset shall be charged over its useful
life by one of the following methods: straight-line
method; sum-of-the-units method; or diminishing
balance.
An asset without a specified useful life may be
amortized over twenty years, but not longer than the
life of a company. Positive goodwill is included in the
intangible assets and amortized on a straight-line
basis over twenty years.
Amortization of negative goodwill is accounted for
as operational income and is written down to the
financial results of a company evenly over twenty
years.
Legal Reserve
A legal reserve is created by a company in
accordance with its foundation documents and may
be used for a limited number of purposes (e.g., to
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Chapter 3. Accounting and Audit
cover the loss of the reporting year). The year-end
balance of the legal reserve is carried forward into
the next reporting period.
Finance Lease
Russian legislation stipulates that risks related
to assets held under finance lease are borne
by the lessor, unless the lease contract provides
otherwise. For accounting purposes, the finance
lease contract must define whether the lessor
accounts for and depreciates an asset held under
finance lease and the lessee accounts for such an
asset off-balance sheet, or vice versa.
Business Expenses
All regular business expenses for accounting
purposes are taken in full into the calculation of the
profit (loss) for the reporting year. Such expenses
include, for example, business travel expenses,
advertising expenses and payments made under
insurance contracts. For some of these expenses,
adjustments are needed in order to calculate profit
for tax purposes. Consideration should be given to
differences between treatment of expenses for
statutory accounting and tax accounting purposes.
Borrowing Costs
Interest on loans is generally either recognized
as an expense and taken in full to the profit and loss
account or capitalized. Russian accounting requires
the capitalization of borrowing costs during the
construction of a non-current asset. Interest costs
relating to intangibles and securities can also be
capitalized up to the moment the asset is
recognized in the books.
Cash Flow Statement
Russian rules do not define the term "cash
equivalents" and, therefore, cash balances per cash
flow statement are reconciled to cash, rather than to
cash and cash equivalents. Only the direct method
is allowed.
Explanatory Notes
The explanatory notes to the annual statutory
financial statements must contain essential
information about the company and the financial
status thereof, comparability of the information for
the accounting year and the preceding years,
significant accounting policies and other significant
information for potential users of financial
statements. Any instances of non-compliance with
the accounting rules must be reported in the
explanatory notes with an appropriate explanation
and discussion of the effect on the statutory financial
statements. The notes must also announce changes
in accounting policies for the following accounting
year.
The regulations prescribe rules of disclosure that
are in many respects comparable with international
practice. These include post-balance sheet events,
contingencies, related parties, earnings per share,
segment information, government grants, etc.
However, the practical implementation and details of
these rules may differ. Generally, the scope of
disclosure in RAR financial statements is lower than
in IFRS financial statements, but is increasing from
year to year.
Consolidated Financial Statements
There is a requirement in Russian accounting to
prepare consolidated financial statements, but they
are still treated as secondary to the stand-alone
statutory financial statements and are often not
prepared. Consolidated accounts can be prepared
under IFRS or RAR.
A decision to prepare consolidated financial
statements under IFRS instead of RAR is made by
the management of the parent company or its
owners/shareholders. IFRS consolidated financial
statements that are prepared instead of
consolidated statutory financial statements must be
provided to the owners/shareholders of the parent
company.
Although the Russian consolidation rules introduce
a procedural framework similar to IFRS, specific
rules may differ (for example, in exceptional cases
investments in subsidiaries and affiliates can be
carried at cost) or may not address a number of
practical issues.
Publication of Financial Statements
According to the Federal Law "On Accounting",
a company's annual statutory financial statements
must be accessible to all interested users, including
bankers, investors, creditors, buyers, suppliers, etc.
Such users can receive copies of the annual
statutory financial statements upon payment of
copying costs.
The Accounting Law also establishes a requirement
that statutory financial statements for certain
categories of companies (for example, open joint-
stock companies, insurance companies) be
published. Such companies should publish their
statutory financial statements in newspapers and
magazines that are accessible to the users of
statutory financial statements, or distribute (among
the users) a brochure containing their statutory
financial statements, and also submit the statutory
financial statements to regional state statistical
authorities in accordance with the company's
registration for further presentation to interested
users.
The publication procedure for open joint-stock
companies requires that balance sheets, income
statements and audit reports be published. Prior to
publication, statutory financial statements must be
approved by an AGM and audited. Depending on
the volume of operations and the size of the
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company, it may publish a balance sheet and
income statement in short form or in full.
The deadline for publication is 1 June of the year
following the reporting year.
Accounting at Branches and RepresentativeOffices of Foreign Companies
The Federal Law "On Accounting" is applicable
to branches and representative offices of foreign
legal entities in Russia, unless otherwise stipulated
under international agreements concluded by the
Russian Federation. In setting up and maintaining
an accounting function (including the preparation
of financial statements), foreign legal entities,
branches and representative offices in Russia may
choose one of the following:� Rules existing in the Russian Federation (RAR);� Rules existing in the country where a foreign legal
entity is located if such rules do not contradict
IFRS, as issued by the IASB.
The choice of accounting rules by a foreign entity
must be documented as an accounting policy.
If a foreign legal entity decides to apply RAR,
it should fully comply with the requirements
and procedures stipulated by the Federal Law
"On Accounting", as well as other statutory
regulations and instructions on accounting.
Under this approach, accounting can be
maintained under the rules adopted by the foreign
company in addition to maintaining accounting
under RAR.
If a foreign legal entity decides to apply rules other
than RAR, it should comply with the requirements
and procedures in effect in the country where the
given foreign legal entity is located.
Irrespective of their choice of accounting rules,
branches and representative offices of foreign legal
entities must maintain tax accounting under the
rules prescribed by the Russian Tax Code.
Implementation of IFRS
In 2004, the new Accounting Development Concept
was adopted, outlining fundamental changes
to be introduced in accounting regulations
and their schedule. The Concept envisages
mandatory preparation of consolidated financial
statements by public and other public interest
companies in accordance with IFRS.
Stand-alone accounts will be prepared by
companies in accordance with Russian accounting
rules, to be developed on the basis of IFRS.
The Concept also includes certain measures
to develop the accounting profession, in particular
delegating the development of accounting
standards to professional organisations while state
authorities still make the decision of whether to
adopt them or not.
It is expected that the procedure for preparing
consolidated financial statements will be established by
a special Federal Law "On Consolidated Financial
Statements", a draft of which is being discussed by the
State Duma. In accordance with the new Law,
consolidated financial statements of public companies
will be prepared solely under IFRS whose recognition
and translation into Russian will be approved by the
government. Consolidated financial statements shall be
subject to audit and publication. The new Law is
expected to be introduced for 2005 financial statements
while companies that prepare financial statements in
accordance with US GAAP will receive a grace period of
up until preparation of 2008 financial statements.
Audit Requirements and Practices
Investor Considerations
� An annual statutory audit is mandatory for all
companies meeting certain criteria set by Russian
legislation.� New Russian Auditing Standards (RSA) are
currently being developed.� Russian standards on auditing are close
to international practice.� Licensing is mandatory for audit firms and auditors
working independently� In order to conduct audit activities, auditors should
hold an audit certificate.
Companies Subject to Statutory Audit
In accordance with Russian auditing legislation,
some companies are obliged to have their annual
statutory financial statements audited. Commercial
non-governmental companies whose annual
statutory financial statements are subject to
statutory audit include:� All open joint stock companies;� Banks and other credit institutions, insurance
companies, commodity and stock exchanges,
investment funds, charitable and other
(non-investment) funds, etc.;� Other companies with annual sales exceeding
500,000 times the average official minimum
monthly wage for the reporting year and
companies with total balance sheet assets
exceeding 200,000 times the average official
minimum monthly wage for the
reporting year (currently RR 50 million and RR 20
million, respectively).
In addition, annual statutory financial statements
subject to publication must be audited by
independent auditors prior to their publication.
Consolidated financial statements are not subject
to mandatory statutory audit.
Auditing Standards/Legislative Framework
The Federal Law "On Audit Activity", enacted in
2001, is still in force. It defines audit services,
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Chapter 3. Accounting and Audit
establishes the rights, obligations and liability of
auditors and audit firms, discusses confidentiality
and independence, and sets forth substantial
compliance regulations.
In May 2005, the State Duma adopted in the first
reading amendments to the Law "On Audit Activity"
which introduce significant changes to the audit
profession. It proposes to replace the licensing of
audit activity with mandatory membership of audit
firms in self-regulated professional associations, to
introduce mandatory quality control and to toughen
the requirements on auditors' independence.
Auditing standards in Russia are expected to be in
line with international standards.
Work on preparing such standards began in 2002,
and as of 1 July 2005 the government had approved
23 Russian standards on auditing.
RSA cover the most important audit issues
and can generally be compared to international
practice.
Conclusion
While significant progress has been made in the
area of accounting reform over recent years,
Russia still lacks a full and comprehensive set of
accounting and auditing standards. The government
recognises this and is working on further accounting
and auditing reforms.
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Appendix 1.
Differences Between Russian Accounting Rules and IFRS
The table below is based on the results of "GAAP 2001 – A Survey of National Accounting Rules", conducted by seven leading accounting
firms, including PricewaterhouseCoopers, and updated to include the latest developments in both RAR and IFRS.
There are no specific rules requiring disclosures of:
Russian accounting may differ from that required by IFRS because of the absence of specific Russian rules on recognition and
measurement in the following areas:
provisions in the context of business combinations accounted for as acquisitions IFRS 3
consolidation of special purpose entitiesthe
the restatement of financial statements of a company reporting
in the currency of a hyperinflationary economy in terms SIC 12
of the measuring unit current as of the balance sheet date AS 29
the translation of the financial statements of hyperinflationary subsidiaries AS 21
the treatment of accumulated deferred exchange differences on disposal of a foreign entity AS 21
de-recognition of financial assets AS 39
the recognition of operating lease incentives IAS 17, SIC 15
accounting for defined benefit pension plans and some other types of employee benefits IAS 19
accounting for an issuer's financial instruments AS 32, IFRS 2
accounting for derivative financial instruments AS 39
hedge accounting IAS 39
accounting for long-term assets held for disposal IFRS 5
the fair values of financial assets and liabilities IAS 32
the fair values of investment properties IAS 40
certain segment information (e.g., a reconciliation between the information
by reportable segment and the aggregated information in financial statements,
significant non-cash expenses, other than depreciation and amortization,
that were included in segment expense and, therefore, deducted in measuring
the segment result – for each reportable segment)
IAS 14
summarised financial information on associates IAS 28
extensive disclosures on business acquisitions/disposals IFRS 3
significant management judgements made in the process of applyingthe entity's accounting policies and key sources of estimation uncertainty
AS 1, IAS 36
26
There are inconsistencies between Russian rules and IFRS that could lead to differences for many enterprises in certain areas.
Under Russian rules:
In certain enterprises, the following issues could also lead to differences from IFRS:
goodwill is calculated by reference to the book value of acquired net assets IFRS 3
proportionate consolidation may be used for subsidiaries in which the parent
holds 50 percent or less of the voting sharesIAS 27
the useful life of property, plant and equipment is usually determined
using periods prescribed by the government for tax purposesIAS 16
finance leases are generally defined in legal terms and the right of capitalization
is given to a lessor or a lessee by a contractIAS 17
the completed contract method can be used for the recognition of revenues under
construction contracts when the outcome of a construction contract can be estimated reliablyIAS 11
trading, available-for-sale and derivative financial assets are not recognized at fair value IAS 39
trading and derivative liabilities are not recognized at fair value IAS 39
any financial investments are not required to be carried at fair value IAS 39
provisions can be established more widely or less widely than under IFRS,
and there is no requirement for discountingIAS 37
the correction of errors is included in the determination
of the net profit or loss for the reporting period, but separate disclosureIAS 8
revenue recognition rules do not differentiate between exchanges of goods
of a similar nature and value and exchanges of dissimilar goods,
and do not discuss adjustment for the amount of cash or cash equivalents
transferred in exchanges for dissimilar goods
IAS 18
some parent companies do not prepare consolidated financial statements under IAS IAS 27.10
in the definition of control, it is not required that the ability
to govern decision making be accompanied by the objective
of obtaining benefits from the entity's activities
IAS 27
certain subsidiaries may be excluded from consolidation beyond those referred to in IFRS IFRS 3
a subsidiary that is a bank may be excluded from consolidation
if it is dissimilar from the rest of the groupIAS 27
certain set-up costs that have been paid by a company's founder can be capitalized IAS 38
nternally generated brands and similar items can be capitalized
if the enterprise has an exclusive legal rightIAS 38
inventories are generally carried at cost rather than at the lower of cost and net realizable value IAS 2
the realizable value of inventories can be measured without deduction of selling costs IAS 2
Chapter 3. Accounting and Audit
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Tax System
Introduction
As mentioned earlier, the Russian tax system
is relatively new. The Tax Code, which took
effect on 1 January 1999, lays down general
principles aimed at rationalizing the tax system.
Currently the Tax Code consists of Part 1,
establishing the basic principles and procedures
of the tax system, and Part 2, which contains
seventeen chapters on specific taxes.
There are a number of significant taxes in Russia
charged in relation to sales and property,
and taxes specific to certain industries or activities
(gaming/gambling, for example). There is
a simplified system of taxation established
for small enterprises, which may pay a unified tax
on income and a reduced number of other taxes;
regional authorities have the right to introduce
a tax on imputed income within their jurisdictions
for legal entities and individual entrepreneurs
carrying out activities in certain industries.
Enterprises, farms and individual entrepreneurs
producing agricultural products may
have to pay a unified agricultural tax
instead of most other taxes if this activity
represents at least 70% of total revenues for a
certain period.
International treaties prevail over domestic
legislation and many double taxation treaties
signed by Russia provide for more favourable
treatment of various transactions than under
domestic law.
The Russian tax system continues to be in a state
of flux – the profits tax and VAT chapters
of the Tax Code were updated beginning
on 1 January 2006, and some important changes
with respect to tax administration are expected
soon.
Tax Year
The tax year in Russia is the calendar year.
Different fiscal year-ends are not permitted.
Tax Administration
Administration of the Tax System
Taxes, duties and fees are enacted by law
and may be changed only by new legislation.
The Federal Tax Service, which is responsible
for collecting taxes, closely coordinates its activities
with the Ministry of Finance, which has overall
responsibility for collection of Russian state budget
revenues and for establishment of taxation
policies. Other law enforcement bodies include, in
particular, the Federal Agency for Economic
and Tax Crimes under the Ministry of Internal
Affairs, which is responsible for investigating tax
crimes.
Tax administration rules continue to be modified.
Recent amendments to the general part of the Tax
Code are seen in many parts as tightening the tax
environment, although they do appear to introduce
more order and certainty in many areas, including
tax audits.
Corporate Taxpayers
Registration Requirements
Every legal entity must register with the tax
authorities in its main location as well as
in each tax district in which it has a branch,
a representative office, other separate
subdivisions, or real property and transport
vehicles. A foreign legal entity is required to
register with the tax authorities in each tax
district in which it conducts business for more than
thirty days in a calendar year (regardless of whether
the activity is taxable or business-type activity),
or where it has real property or transport vehicles.
A simplified registration procedure is available
to foreign legal entities that do not carry out activity
in Russia, but have movable property subject
to taxation in Russia or wish to open accounts
with a Russian bank. A foreign legal entity must
notify the tax authorities in each tax district in which
it has a source of income. Notification should
also be sent to the tax office which is responsible
for the territory where a foreign legal
entities' movable property is located.
Chapter 4.
Taxation
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Chapter 4. Taxation
Tax Returns and Assessments
Companies are required to file tax returns
with the tax authorities on a monthly, quarterly or
annual basis, depending on the particular tax
and the company's line of business. Taxes are paid in
monthly, quarterly or annual instalments,
and a final adjustment made when annual tax returns
are submitted. The tax authorities do
not issue tax assessments to enterprises. Instead, the
company must pay the amount of tax indicated in the
tax return.
Tax Audits
Tax returns are desk-audited by the tax authorities
upon submission. In addition, the tax authorities have
the right to perform regular field audits
of companies. Under current tax law, field audits
may not last for more than three months,
and may cover only three calendar years prior
to the year of the audit. Once audited, the tax
authorities may not audit the same period again,
except upon reorganization or liquidation
of a taxpayer, or as part of a superior tax office
review.
Individual Taxpayers
Tax Residence
An individual is considered a Russian tax resident
if physically present in the Russian Federation
for 183 days or more in a calendar year.
Employer's Withholding Obligations
Income tax should be withheld at source,
by an employer who is deemed to be a tax agent, on
all remuneration paid to individuals
(employees and individual contractors, except for
those who are duly registered individual
entrepreneurs). Under current rules, responsibility to
act as a tax agent lies with Russian entities, individual
entrepreneurs and permanent establishments of
foreign legal entities in Russia.
In addition to withholding obligations, employers must
provide information to the tax authorities
on income paid and tax withheld, and notify
the tax authorities about the amounts
of income received by individuals from whom tax
could not be withheld.
Tax Returns
An individual is required to file an annual tax return
with the Russian tax authorities if he/she:� is self-employed;� received income from which Russian tax was
not withheld by a tax agent; � is a Russian tax resident and received income
from sources outside Russia; or� is entitled to and intends to take an income tax
deduction provided for under Russian law.
Personal income tax withheld by a tax agent
is credited against the final tax liability
for the year.
Spouses
Spouses are liable for personal income tax separately
and are required to submit their own tax declaration,
where applicable.
Exit Permits
When an expatriate individual ceases his/her
activities in Russia, a final tax return must be
submitted within one month prior to departure.
A formal exit permit is not required.
Tax Administration for Foreign Nationals
Foreign nationals are generally treated in the same
way as Russian nationals. In Moscow, tax returns
of foreign individuals are processed centrally
(by a dedicated local tax office).
Penalties and Interest
The law stipulates a variety of tax violations
with various penalties for each violation.
For example, a 20% or 40% penalty is charged
for underpayment of taxes. The late filing of a tax
declaration carries a penalty of 5% to 10% per month
of the unpaid tax. A number of fixed penalties are
imposed on a taxpayer for failure to register, and
failure to supply the tax authorities with required
information, etc. Failure to withhold tax due results in
a 20% penalty for the tax agent.
Interest for late payment is charged at a rate not
in excess of 1/300 of the Central Bank of Russia
re-financing rate (12% from 26 December 2005
and 11.5% from 26 June 2006) per day. The amount
of underpaid tax and interest for late payment can
generally be collected by the tax authorities without
the consent of the corporate taxpayer or a court
ruling. However, collection of penalties requires the
ultimate consent of the taxpayer or a court ruling.
Appeals
In the event of an overpayment of tax, the taxpayer
may apply for a refund or offset of the amount
overpaid against other taxes or future tax liabilities.
Appeals contesting decisions of the tax authorities
may usually be made to the next highest tax authority
or through the courts. While the overall statistics
suggest that taxpayers prevail in court
in more than half of all cases, there is an emerging
trend of courts ruling more often in favor of the tax
authorities, especially in VAT refund disputes.
Principal Taxes
The structure of the Russian tax system provides
revenues for three budgetary tiers: federal, regional
and local. All taxes are legislated at the federal level,
although regional and local governments have
the power to set rates and establish procedures
for those taxes that are specifically designated
as regional or local. Generally, the lower-tier
authorities cannot grant concessions with respect
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to taxes allocated to a higher authority
(i.e., regional authorities cannot grant concessions on
federal taxes). The regional authorities have
the right to reduce original profits tax rate by no more
than four percentage points for certain groups of
taxpayers. They can also introduce lower property tax
rates, as well as grant property tax exemptions.
Above is a summary of the major taxes currently
payable by businesses and individuals in Russia.
Please note, however, that this list is not all-inclusive
and that there are a number of other federal, regional
and local government fees on certain activities,
including various stamp duties and license and
registration fees.
Apart from the taxes listed above, a company may be
liable to certain obligatory pension and social
insurance payments and pollution charges. Customs
duties are governed separately by the Customs Code.
Taxation of Corporations
Corporations and their shareholders are taxed
separately. Starting 1 January 2002, the profit tax rate
for all taxpayers does not exceed 24% (federal portion
of 6.5%, regional portion of up to 17.5%, but no less
than 13.5%). The corporate income tax system
distinguishes between resident legal entities which
pay tax on their worldwide income, and foreign legal
entities which pay profits tax on income derived
through a permanent establishment (at the rate of
24%) and are also subject to withholding tax
on income from Russian sources not related to a
permanent establishment (at rates varying from 10%
to 24% depending on the type of income and the
mechanism for its calculation).
Russian Entities � Profit Tax
A Russian legal entity is taxable on worldwide profits.
Legal entities are generally subject to profit tax on
income generated from the sale of goods, work or
services, the sale of property and any other income
(receipts), unless it is specifically exempt from
taxation. Sales income for tax purposes may be
computed using only the accruals basis; only small-
scale taxpayers are still allowed to use the cash
basis. Since the introduction of Part 1 of the Tax
Code, tax in relation to branches is not calculated
separately, but instead a portion of the overall tax
liability should be distributed to the regional and/or
local budget where the branches are located. The
accounting year is the calendar year.
Expenditures are generally allowed on an accruals
basis. The Profit Tax Chapter of the Tax Code has
made a significant step forward with respect to
improving deductibility rules for tax purposes. The
new rules have significantly broadened the list of
deductible expenses – now the main criteria for
deductibility is that the expense should be incurred for
the purpose of carrying out activities aimed at
deriving profits, be economically justified and
supported with relevant documentation. The Tax Code
establishes a list of non-deductible expenses (or
partially deductible, such as entertainment expenses,
certain types of advertising expenses, interest on
loans and other expenses) and defines certain
expenses subject to amortization. Depreciation is
usually tax deductible within norms (straight
line or reduced balance depreciation method).
Intangibles are amortized over the life of the asset (or
ten years if the useful life of the asset cannot be
ascertained).
Tax losses may be carried forward for ten years. In
2006, the deduction is allowed to be up to 50% of the
tax base for 2006 before deduction. From 2007 this
limitation will be abolished.
Profit tax is payable on a year-to-date basis.
Companies may choose between paying profits tax
monthly, on the basis of actual profits, or quarterly
with monthly advance payments, calculated
on the basis of the profits of the previous quarter. The
final payment for the year is due by 28 March
of the following year. The quarterly and annual returns
should be filed within the same deadline
as the payment due dates.
� VAT Payments
Sales of goods, works and services within Russia,
and imports of goods into Russia, are subject
to value-added tax (VAT). VAT is payable
at a standard rate of 18% on most goods, including
imported goods, and services. A 10% reduced rate
applies to a limited range of basic food items,
children's goods, medicines and some mass
media products. VAT is accounted for by vendors
of goods or services and importers of goods.
Some items are exempt from VAT (insurance and
banking operations with some exceptions, circulation
� Profit tax� Value-added tax (VAT)� Excise taxes� Personal income tax
Federal Taxes� Unified social tax� Mineral resources extraction tax� Payments for the use of natural resources� Water tax� Stamp duty
� Tax on property of organizations
Regional Taxes (property tax)� Transport tax� Gaming tax
Local Taxes� Land tax� Individual property tax
Major Taxes Currently Payable by Businesses and Individuals in
Russia
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Chapter 4. Taxation
of securities, certain medical equipment/services,
etc.), but recovery of input VAT may be restricted.
Exemptions are available from import VAT
for technological equipment, related components and
spare parts contributed to a company's charter
capital. Export of goods and provision of certain
export-related services are subject to VAT
at the zero rate. Exports to and imports from CIS
countries are considered exports and imports for
Russian VAT purposes.
For cross-border services, there are special rules
(similar to those of the EU's Sixth Directive)
determining whether they are provided within or
outside of Russia. In particular, services of a
consultancy nature, or certain services related to
patents, licences or similar rights, rendered to an
entity which has a place of activity in Russia are
subject to VAT. Services related to property located in
Russia are also subject to Russian VAT.
VAT on expenses incurred in connection
with the performance of activities subject to VAT,
as well as VAT on purchased or imported fixed
and intangible assets, is creditable provided
the goods/services are actually received. Credit
for input VAT with respect to certain business trips,
entertainment and advertising expenses is limited
by reference to the same limits as for the profit tax
deduction. If sales are exempt from VAT
as a general rule the input VAT is not credited
but is added to the cost of relevant expenses.
VAT on capital construction can now be credited.
Branches are not independent VAT taxpayers.
A legal entity should calculate VAT as a whole,
declare it in a single VAT return to be submitted
and subsequently paid to the tax authority where it is
registered (normally, where the head office is located).
VAT is generally paid on a monthly basis.
For taxpayers with quarterly revenues of less
than RR 2 million, the tax period is a quarter.
The deadline for submitting tax returns and payment
of VAT is the 20th day of the month following
the expired tax period.
� Excise Taxes
Excise taxes apply to the production and importation
of cars, tobacco, alcohol, petrol and lubricants.
� Transport Tax
Regional authorities are entitled to introduce a
transport tax. The tax is in most cases based on a
vehicle's engine capacity. The exact tax rate is
established by the regional authorities within
the allowed limit.
� Property Tax
From 1 January 2004, the property tax base has
been significantly reduced and currently includes only
the net book value of fixed assets reflected
on the taxpayer's balance sheet. Intangible assets,
inventories and work-in-progress are now excluded
from the property tax base of a legal entity.
The maximum property tax rate is 2.2%. Regional
legislative bodies can introduce lower property tax
rates, as well as grant property tax exemptions.
Foreign Entities (specifics)
The basic rules of taxation described above are
equally applicable to overseas companies present
in Russia, with certain specifics briefly summarized
below.
� Profit Tax Specifics
Foreign legal entities pay tax on profits attributable to
a permanent establishment (PE). A PE is broadly
defined as "a branch, division, office, bureau, agency,
or any other place through which a foreign legal entity
regularly carries out its business activities in Russia".
Russia's various double taxation treaties could define
a PE differently, which could mean tax relief in some
cases. Conducting business through an agent may
also create a taxable PE in Russia.
Profits of a PE are computed on substantially
the same basis as Russian legal entities, including
composition of tax deductible expenses. The Tax
Code does not specifically provide for deductibility
of expenses incurred abroad by a head office
with respect to its PE in Russia, though most double
tax treaties provide for such a possibility. If a foreign
legal entity conducts free-of-charge preparatory
and/or auxiliary services for third parties, a PE is
considered to have been formed, and the tax base is
calculated as 20% of its expenses relating to such
activities.
Foreign legal entities operating in Russia through
a PE are to follow broadly the filing and payment
schedules as established for Russian legal entities,
although they do not make monthly advance
payments and pay profit tax on a quarterly and
annual basis only.
Where a foreign legal entity does not create a PE
in Russia and is not protected by a double taxation
treaty, withholding tax rates are as follows (withheld at
source):� 15% in relation to dividends and income from
participation in Russian enterprises with foreign
investments;� 10% in relation to freight income;� 20% in relation to some other income from
Russian sources, including royalty interest, capital
gain (special procedure for disposal of immovable
property and shares in Russian subsidiaries where
the major assets are immovables).
The income tax withholding rates may be reduced
under the terms of a relevant double taxation treaty,
and its provisions may be applied based on a
confirmation of tax residence to be provided by a
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foreign company to the Russian tax agent
(no advance permission from the Russian tax
authorities is required).
� VAT Specifics
Non-tax-registered suppliers of works and services
are subject to Russian VAT collectible via a reverse-
charge withholding mechanism. The VAT reverse
charge is withheld at source by a resident tax-
registered agent at the rate of 18/118 (or 10/110) of
the amount of income paid inclusive of Russian VAT.
This VAT may normally be credited by the agent as
input tax, provided certain requirements are met.
Taxation of Shareholders
Domestic Shareholders� Dividends
Dividends received from Russian companies by
a Russian company or Russian individual tax resident
are taxed at 9% at source. Dividends received by a
Russian company from a foreign entity are taxed at
15% on receipt.
� Capital Gains
Capital gains of a resident business entity must be
included in its worldwide income, which is subject
to corporate income tax. Losses from the sale
of securities are deductible only to the extent of gains
earned on the same class of securities (although
certain exceptions apply for banks, brokers and other
financial institutions). Losses from the sale of fixed
assets may be deducted for profit tax purposes in
equal installments during the remaining economic life
of the asset sold. There is no separate capital gains
tax.
The capital gains of tax resident individuals are
taxable in Russia at 13% personal income tax.
Specific property deductions may be applied
to the taxable income.
Foreign Shareholders� Dividends
A 15% tax is levied on all dividends paid by Russian
subsidiaries to non-resident corporations, 30%
for non-resident individuals. These taxes can be
reduced or even eliminated under the provisions
of a relevant double tax treaty.
� Capital Gains
Foreign shareholders are subject to Russian taxation
with respect to income from the disposal of shares
if this income is attributed to a PE, or if the value
of immovable property located in Russia represents
more than 50% of the total asset value
of the investee. With respect to the second case,
relief is available under many tax treaties.
Taxation of Individuals
� Territoriality and Residence
For both Russians and foreigners, tax residence
in Russia is determined by the number of days
in the calendar year a person is physically present
in Russia. An individual is considered resident
if physically present in Russia for 183 or more days in
a calendar year. Starting from the reporting period for
2007, the wording "calendar year" is to be changed to
"twelve consecutive months", but interpretation of this
amendment has not been introduced yet.
Russian residents are liable to tax on their total
worldwide income received during the calendar year
at a flat rate of 13% (except for dividends and other
minor exceptions). Non-residents are taxed at 30% on
income received from Russian sources (including
income attributable to work in Russia, dividends
from Russian companies, etc.), though it may be
possible to apply a relevant double tax treaty
to exempt certain types of income from Russian
taxation.
Different rates are established for dividends
received by resident taxpayers (9%) and certain
income gained from receipt of prizes, insurance
benefits, excessive interest on bank deposits
and selected loans (35%). Benefits in kind are treated
as taxable income valued at market prices
(provision of a car for private purposes, etc.).
The benefit of receiving a loan at an interest
rate lower than the Central Bank of Russia re-
financing rate for rouble-denominated loans,
or 9% for foreign currency loans, is included in
taxable income.
There are a number of allowances, deductions and
exemptions deducted or excluded in arriving
at taxable income.
� Payroll Taxes
Russian payroll taxes were substantially reduced from
1 January 2001. Currently, companies pay the
following taxes/contributions/tariffs on an employee's
compensation:� Unified Social Tax (generally levied on total
income payable to employees and contractors
at regressive rates from 26% (for low-income
employees to 2%);� Obligatory Pension Insurance Contributions (also
accrued on total income payable to employees and
contractors at regressive rates, depending
on the cumulative remuneration; the amounts
of these contributions reduce the federal portion
of the Unified Social Tax);� Insurance tariffs for mandatory social insurance
against work-related accidents (the current rates
of such tariffs vary from 0.2% to 8.5%, depending
on the employer's activity).
Special procedures with respect to foreign nationals
were abolished effective 1 January 2003; i.e., all
components of the Unified Social Tax must now be
paid on expatriates' remuneration. Remuneration
of foreign nationals temporarily residing in Russia is
exempt from Obligatory Pension Insurance
Contributions.
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Chapter 4. Taxation
Income payable to contractors working under civil
contracts is exempt from the portion
of Unified Social Tax attributable to the Social Fund
and insurance tariffs provided that accident
insurance is not stipulated in relevant contracts.
Taxation of Foreign Operations
Resident Russian companies are taxed
on their worldwide income, including the profits
and losses of foreign branches, interest, royalties
and capital gains. Credit relief is available
for foreign tax paid, up to the amount
of the Russian tax liability, which would have
been due on the same amount under Russian
rules.
Dividends received from foreign subsidiaries
are taxed in Russia at 15%. Tax withheld
on dividends received from abroad may be
creditable if there is a special provision
n the relevant double tax treaty.
Gains (excess over nominal value of shares)
from the liquidation of foreign subsidiaries are
aggregated into taxable income. Foreign exchange
profits and losses are included in the taxable
income/deductible expense.
Transfer Pricing
Under the Russian transfer pricing rules,
introduced on 1 January 1999, the tax authorities
have the right to adjust the prices of transactions
between related parties, barter transactions,
foreign trade transactions and in relation
to sales where the prices fluctuated by more
than 20% within a short period. If a transaction
meets any of the above criteria (a controlled
transaction), the price used can be adjusted
for tax purposes if the tax authorities prove that it
differs from the market price by more than 20%.
At the moment, the transfer pricing rules apply
to transactions with goods, work and services.
Property rights are excluded from the list
of controlled transactions. Russian transfer
pricing rules stand out by applying not only
to transactions between related parties, but
also to transactions between unrelated parties
assuming they meet the above criteria.
Since the introduction of transfer pricing rules
there have been plans to make significant
changes to them. These include the extension
of the list of related parties (affiliated and
sister companies will be included); inclusion
of transactions with information or property
rights and set-off of mutual liabilities
n the list of controlled transactions; and
abolishment of the 20% safe-harbour rule and
introduction of requirements for taxpayers to
maintain transfer pricing documentation.
At present, it is not clear if and when these
amendments will be enacted.
Tax Treaties
Russia currently honours those tax treaties that
were signed by the former Soviet Union until they
are superseded by new treaties. Tax treaties that
are presently concluded with Russia are based on
the OECD Model Treaty, although
the UN Model Convention for developing countries
has had an influence as well.
Local Russian tax authorities generally do not have
extensive experience with the interpretation and
application of double taxation treaties.
Withholding Taxes and Permanent Establishment
Withholding taxes on interest, dividends and
royalties are typically decreased by tax treaties.
Starting 1 January 2002, treaty benefits can be
claimed by any entity or person, provided
that the tax residence certificate of the foreign
company is available (no advance clearance is
required to apply treaty rates).
A distinct similarity in the definitions of permanent
establishment under existing treaties and under
domestic law tends to mean that few, if any, treaty
benefits are available for taxation of profits. It
should be noted, however, that the domestic
definition does not require a place of business to
be "fixed", unlike most treaties. Some tax treaties
provide more favorable rules with respect to certain
types of tax deductions when determining the
amount of business profits taxable by the Russian
Federation (e.g., the German treaty allows for
unlimited deduction of advertising expenses).
Personal Services
Most income from freelance activities is not taxable
in Russia if an individual from a treaty country
does not derive income through a fixed base in
Russia. Employment income is generally taxable,
unless the individual spends 183 days or less in
Russia during the tax year (or twelve-month period
for some tax treaties) and remuneration from a
non-resident employer is not borne by a permanent
establishment of that employer in Russia.
Elimination of Double Taxation
Russian provisions for the elimination of double
taxation generally take the form of credit for taxes
paid in other countries. For personal income tax
and for corporate tax on dividends, credit is
granted only if a relevant double taxation treaty,
which contains such a provision, is in force.
Competent Authority/Mutual Agreement
A taxpayer who believes that the actions of one or
both of the contracting states result, or will result,
in double taxation may, regardless of the remedies
provided by the domestic law of those states,
present the case to the competent authority
of the contracting state where it is domiciled.
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The competent authorities of the contracting states
may communicate directly to reach an agreement.
The competent authority for all of Russia's double
taxation treaties is the Russian Ministry of Finance.
We are aware of an increasing number of cases
where such communication took place, although
in absolute terms the number remains quite low and
the procedure is usually followed only in exceptional
cases.
Industry Specifics
Energy, Utilities & Mining
Profits Tax specifics: deduction of expenses related to mineral
resources development:� Expenses incurred in exploring and appraising
mineral resource deposits shall be deducted evenly
over a twelve-month period following the completion
of the work.� Expenses incurred in relation to the development of
mineral resource deposits that prove to be
unsuccessful shall be recognised for tax purposes
within the twelve-month period following notification
of the relevant federal agency of the State Subsoil
Fund.� Expenses related to a "dry well" shall be recognised
for tax purposes evenly over a twelve-month period
following abandonment of the given well.� Expenses incurred in preparing the relevant area
for mining activities and in compensating damages
to natural resources shall be deducted evenly
over a five-year period.� Abandonment cost is deducted in the period when
incurred.� Expenses incurred in obtaining a license for the
development of mineral resources, deposits,
payments for geological information, levies for
participation in a tender, etc. shall constitute the
value of the license, which shall be treated as an
intangible asset and depreciated within the period
of the license.
Mineral Resources Extraction Tax (MRET)
MRET, introduced on 1 January 2002 replaced
mineral resource restoration payments, royalties and
excise tax on the production of oil and gas
condensate.
Specific rates apply for each type of mineral
resources, for example: 4% for black coal; 6%
for gold; 8% for diamonds and other precious
and semiprecious stones; 17.5% for gas
condensate; and RR 147 for 1000 cubic meters of
natural gas.
MRET with respect to crude oil shall be calculated
as the amount of oil produced multiplied by a basic
tax rate set in RR per ton subject to an adjustment
based on a special coefficient (C) reflecting
the dynamics of world oil prices and the RR-US$
exchange rate. Starting 1 January 2005, the basic
tax rate is RR 419 per ton. The above coefficient C
is applied on a monthly basis and starting 1 January
2005 is calculated as follows:
C=(P-9)*R/261, where:
P is average for the tax period price for Urals-grade
oil per barrel; and R is the average RR-US$
exchange rate as determined by the Central Bank of
Russia over the relevant tax period (a month).
For example, the rate of MRET for June 2006 was
established as RR 2,376 per ton.
Significant amendments were introduced to the
procedure for calculating MRET for green-fields and
depleted fields. Starting 1 January 2007, a zero rate
(so-called royalty holidays) will be applicable to
green-fields located in the Republic of Sakha,
Irkutsk Oblast and the Krasnoyarsk region until the
achievement of an accumulated extraction volume of
25 million tons, if the period of development of the
field does not exceed ten years, or equal to ten
years for licences on development and extraction, or
fifteen years for licences on research, development
and extraction. Such amendments were aimed
at stimulating the development of new oil fields
in Russia. Moreover, the rate of MRET will
decline with respect to old fields after the
achievement of a depletion ratio of 80%
(extraction on such fields is practically 'frozen' now
for economic reasons).
Oil-related Export Duties
In early 1999, the government reintroduced export
customs duties on crude oil and oil products.
Following increases in world oil prices, the export
customs duties have been increasing steadily.
In September 2001, the Law on Customs Tariffs was
amended to establish the procedure for determining
the maximum rates of export customs duties
for crude oil. Under this procedure the Russian
government reviews export customs duties for crude
oil every two months based on the average price
of Urals blend. The average Urals crude oil blend
price is calculated as the price for Urals blend
on world markets (Mediterranean and Rotterdam)
for the two months immediately preceding
the current two-month period.
Starting 1 June 2006, the actual rate of export duty
is US$199.80 per ton.
As the above information demonstrates, there is
a correlation between MRET and Oil-related Export
Duties burden and oil prices.
Payments for the Use of Subsoil
Payments depend on the size of the licence area
provided to the exclusive user of the subsoil and
apply to the size of the licence area not including
mining allotments. The current annual minimum and
maximum rates of regular payments are set
as follows:
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Chapter 4. Taxation
� The rate for the right to prospect and evaluate oil
fields ranges from 120 roubles/ km2 (50 roubles/km2
for offshore areas) to 360 roubles/km2
(150 roubles/km2 for offshore areas); � The rate for the right to explore oil fields ranges
from 5,000 roubles/km2 (4,000 roubles/km2 for
offshore areas) to 20,000 roubles/km2
(16,000 roubles/m2 for offshore areas).
Exact rates for specific areas are to be set by
regional authorities for onshore areas and
the Ministry of Natural Resources for offshore
areas.
Excise Tax on Oil Products
Currently excise tax is charged on the following
transactions involving gasoline, diesel fuel and
motor oils: � Purchase and receipt of oil products, including
receipt of oil products manufactured by a taxpayer
from its own raw materials, except in certain
cases; � Import of oil products; � Transfer of oil products by the producer to the
owner of oil products made under tolling
arrangements, except in certain cases.
Starting 1 January 2005, the following excise tax
rates for oil products apply:
Oil Product Rate per tonne
Gasoline under 80 octane 2,657 roubles
Gasoline over 80 octane 3,629 roubles
Diesel fuel 1,080 roubles
Motor oil 2,951 roubles
Starting 1 January 2007, excise will be charged
on the sale (rather then receipt) of gasoline,
diesel fuel and motor oils and payable by
a company which produced such products.
Moreover, transfer of oil products by the producer
to the owner under tolling agreements, use
of oil products for own needs, transfer of oil
products to charter capital, transfer of oil
products by the owner under tolling agreement, and
import of oil products will also be taxable
transactions.
Tax regime for investors under Production Sharing Agreements
(PSAs)
The PSA chapter of the Tax Code, introduced in
June 2003, has established a special tax regime for
PSAs. The new tax regime for PSAs may be applied
only if the following requirements are met: no
investor accepted the right to use a given subsoil
plot on the terms of development under the general
tax regime during a tender; the share of the Russian
Federation in the total volume of extracted mineral
resources is no less than 32% under direct product
sharing agreements; and the given PSA provides for
an increase in the share of the Russian Federation
in profit production if improvements are made to the
project's investment performance indicators. The
following specific features of the tax regime apply to
investors under PSAs: � Import of goods designated for the execution of
a PSA is exempt from import customs duties,
export of mineral resources produced under a PSA
is exempt from export customs duties;� Profits tax is levied on the value of profit oil
received by the investors and non-operational
income reduced by the amount of tax deductible
expenses which are not included in the
recoverable cost. Cost oil received by investors in
compensation of recoverable costs is not taxable;� The profits tax rate shall be determined in
accordance with the provisions of the Tax Code as
of the date when the given PSA takes effect, and
shall apply for the entire term the PSA is valid;� The mineral resources extraction tax is 50% lower
for natural resources produced under a PSA;� PSA investors are exempt from property tax on
property used to conduct activities under the PSA.
The PSA Law, alternatively, provides for the
possibility of concluding direct product sharing
agreements under which the quantity of mineral
resources produced is directly divided between an
investor and the state, and the investor is not
subject to profits tax or mineral resources extraction
tax.
Technology, InfoComm, Entertainment and Media
Changes in taxation of the InfoComm sector are
driven primarily by the ongoing liberalisation
Average Price for Urals Crude Oil Blend Export customs duties
Up to US$109.50 per ton (US$15.00 per barrel) 0%
US$109.50 to US$146.00 per ton 35% of the difference between the average
(US$15.00 to US$20 per barrel) price (per ton) and US$109.50
US$146.00 to US$182.50 per ton US$12.78 plus 45% of the difference between the average (US$20 to US$25.00 per barrel) price (per ton) and US$146.00
Greater than USUS$182.50 per ton US$29.20 plus 65% of the difference between the (US$25.00 per barrel) average price (per ton) and US$182.50
Starting 1 August 2004, the maximum export customs duties rates for crude oil were set as follows:
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of the market and new legislation governing certain
key areas like interconnection, licensing and
universal service obligations. New interconnection
rules have altered the way local and long distance
operators (including Rostelecom and emerging
competitors) settle for origination and termination
of local and long distance calls, as well as
interconnection set up and servicing. The impact
of new tariff-setting regulations on revenue
recognition and transfer pricing rules still needs
to be assessed. Contributions to and distributions
from a universal service obligation reserve
will change the revenue and cost base
of operators. The most recent development is the
introduction of the Calling Party Pays principle,
which is also driving substantial change in cost and
revenue models, primarily in the wireless sector.
The Technology sector is likely to benefit from reform
plans carried out by the government. First, the law
was passed to introduce the concept of special
economic zones, which covers technology parks.
Second, effective from 1 January 2007 a special tax
regime was introduced for the information
technology (IT) industry which should relieve the tax
burden on labour compensation costs (which are
believed to represent up to 70% of the total cost
base). Third, a further boost will be provided
by the changes in the profits tax rules easing certain
restrictions on the tax deductibility of R&D
expenditure.
The key challenges posed to the Entertainment and
Media sector include plans to abolish a reduced VAT
rate for mass media products and services (although
these are still far from being finalized and are under
debate) and the emergence of new sectors like
gambling and mobile content services for which
taxation rules are still unclear and incomplete and
thus require special attention in order to avoid
potential disputes. Of the many rapidly growing
industry segments, the most noticeable are filmed
entertainment, TV and cinema theatres, in which
national players successfully compete with major
global ones.
Financial Services
In addition to general provisions, Russian tax
legislation prescribes specific treatment of particular
types of companies in the financial services sector,
such as banks, broker-dealer organizations, pension
funds and insurance companies. Certain expenses
may be deductible for financial services companies,
such as loan loss and securities diminution
provisions and special reserves created by
insurance companies.
There are also special provisions on taxation of
transactions with financial instruments, such as
trading with securities and derivatives (including
hedging instruments) and REPO transactions. They
require that taxpayers calculate financial results from
the above operations based on tax accounting rules
which may differ from results in financial accounting
records.
The key principles for the taxation of securities
require that the sales price should be comparable
to the fair market value, which differs depending
on whether securities are traded on an organized
market or not. Only companies with a security
broker licence can deduct securities tax losses
from income from other operations without any
limitations. Companies without a broker's licence
have to calculate financial results from operations
with listed and unlisted securities separately and
may not deduct the net loss from each basket
from income from other operations.
Income and loss from transactions with derivatives
are calculated on an accruals basis. The tax
law requires that derivatives transactions be
carried out at fair market value and there are
special rules for calculating derivatives' fair market
price. Losses from transactions with derivatives
not traded on an organized market are not
deductible from income from other types of
operations. Special rules exist for calculation
of the taxable base for deliverable derivatives
transactions with foreign currency for banks,
as well as deliverable forward transactions
with underlying assets other than currency
valuables.
The tax law provides special rules for hedging
derivatives transactions. If a hedging derivative
meets the criteria established in the law, its income
and losses will be included in the same tax base as
transactions with the underlying asset.
REPO transactions that qualify as such under the
Tax Code are treated as loans for tax purposes.
36
Import Tariffs
Import tariffs (customs duties) apply to most goods.
The majority of customs duty rates in Russia are ad
valorem (i.e., a percentage of the goods' customs
value). There are also specific duties for certain types
of imported goods, calculated by volume, weight or
quantity. Some duties have a combined rate
incorporating the above two types of duty and,
therefore, the tax basis may vary. The customs
valuation procedure is established in line with
GATT/WTO principles and is generally equivalent to
the DAF/Russian border transaction value of the
goods concerned. Classification of goods for customs
purposes follows the international Harmonized System
of Coding and Description of Commodities.
Base customs duty rates vary widely, from 100% on
spirits to 0% for some printed matter and some other
priority imports. Zero duty applies, for example, to a
wide range of equipment and machinery. Despite this
wide possible range, average duty rates fall between
5% and 20% of goods' customs value. The base rates
specified in the legislation apply to countries that have
been granted Most Favoured Nation status. Some
goods from "developing" and "least developed"
countries may be imported at 75% of the base rates or
zero rates, respectively. However, the range of such
goods is limited to raw materials and handmade
articles. Goods originating in other countries will be
subject to duty at double the base rates.
Customs Duty Exemptions
The following are exempt from customs duty: transit
goods; goods imported by individuals for personal use
(worth not more than approximately $2,400 and
weighing less than 35 kg); cultural valuables; goods
with a nominal total customs value (between US$180
and US$375, depending on import conditions); means
of transport involved in the international movement of
goods and passengers; humanitarian aid and some
others.
Goods originating from CIS countries are also exempt
from customs duties (subject to certain conditions).
Russia, Belarus, Kazakhstan, Kyrgyzstan and
Tajikistan form the Customs Union, and goods
originating from these countries are not subject to
customs duties within the Customs Union.
Fixed production assets imported as a charter capital
contribution of a foreign investor are also free from
customs duties. The goods must not be excisable and
need to be imported within
the timeframe established for the formation
of the charter capital. Exemption is subject
to approval by customs.
Customs authorities can check to ensure the correct
use and further disposal of goods exempted
from customs duties.
Customs payments on temporary importation of goods
Goods may be imported by enterprises under
a temporary import customs regime, normallyfor a
period of up to two years, which requires periodic
customs payments of 3% per month of the total
customs payments payable had the goods been
imported for free circulation. Upon re-export of the
goods, the periodic customs payments made are not
refunded. Customs have the right to require security
for customs payments (e.g., deposit, pledge, bank
guarantee, etc.). Goods which qualify as fixed assets
for production purposes may be admitted and subject
to a 3% monthly customs payment for a temporary
import period of 34 months if the Russian user does
not yet have property rights (e.g., for leasing). Upon
expiration of this period, the goods are considered
released for home use. The interest on customs duties
and taxes by installments is not payable. Temporarily
imported goods can only be used by a person who
has obtained customs permission for such temporary
importation.
A number of Special Economic Zones (SEZ) with a
free customs zone regime has been established in
Russia. Imports into such zones are free of duty and
VAT, i.e. foreign goods are delivered to and used within
the SEZ free of import customs duties and VAT. When
foreign goods or products of their processing are
subsequently released into free circulation to the rest
of Russia, import customs duties and VAT are payable.
If the goods manufactured in a particular SEZ are
exported to foreign countries they will be subject to
export duties, if any. Foreign goods which were
imported in the SEZ but not processed may be re-
exported without payment of export customs duties.
Chapter 5.
Customs
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Employment Relations
Employer/Employee Relations
Employer/employee relations are heavily regulated by
the Russian Federation Employment Code.
Considerable safeguards have been established
to protect employees against wrongful dismissal,
a harmful working environment and excessive work
periods. Employment legislation makes it very difficult
for the employer to terminate employment
at its own initiative.
Employment Contracts
A written employment contract in Russian setting out
the basic terms of the employment relationship must
be concluded with each employee working
in Russia. Russian employment law provides all
employees with minimum guarantees that cannot be
made worse by any other agreements between
the employer and the employee unless federal law
provides otherwise.
As a general rule, employment contracts are
concluded for an indefinite period. A fixed-term
employment contract may also be concluded, but
it cannot be concluded for more than five years, and
only in those circumstances specifically provided
for by the Russian Federation Employment Code.
Moreover, recent court practice shows that the
employer must prove and substantiate the reasons for
a fixed-term employment contract in the event
of any dispute. Otherwise, the employment agreement
shall be deemed to have been concluded for an
indefinite term.
Under Russian employment law, job duties and
obligations should be defined in the employment
contract. This is very important since an employee
cannot subsequently be required to perform tasks
outside the scope of duties described
in the employment contract.
In accordance with Russian employment law,
employers are required to issue an internal order each
time an employee is hired, transferred to a new job,
granted a vacation, disciplined or dismissed, among
other situations.
Probation Period
Probation periods may not exceed three months (six
months for special categories of employee) and must
be specifically provided for in the employment
contract. Probation periods are forbidden
for employees under the age of 18 and for some other
categories of employee.
Wages and Salaries
The current monthly minimum wage, set in May 2006,
is RR 1100.
Working Hours
Under Russian employment law, employers are
required to keep a record of all time worked by each
employee, including overtime. The standard working
week in Russia is 40 hours over a five- or six-day
week. Russian legislation specifically defines
the permitted working hours and the proper
compensation for overtime and holiday/weekend work.
On the eve of public holidays, the law requires that the
workday end one hour earlier.
Paid Holidays, Vacations and Days Off
All employees are entitled to a minimum of 28
calendar days of paid leave per year. Normally,
vacation entitlement is granted to employees
after they have worked at a company for six months
continuously.
Russia has eight official annual public holidays, which
in aggregate entitle employees to twelve days off (see
box at the end of Chapter 1).
In accordance with the Russian Federation
Employment Code, the length of days off (time
off between work weeks) shall be no less than 42
hours.
Termination of Employment
An employer may terminate employment only
on the specific grounds provided in the Russian
Federation Employment Code. Detailed and varied
termination requirements make it advisable to seek
legal advice before dismissing an employee.
An employee must give two weeks' notice
of resignation.
Chapter 6.
Labour Relations and Social Security
38
Chapter 6. Labour Relations and Social Security
Other Benefits
Under current legislation, all employees are entitled
to paid sick-leave allowances. However, under
recent legislation, the benefits for temporary
incapacity to work shall not exceed a sum equal
to RR 15,000 for one calendar month.
There are private health clinics in major Russian
cities, and membership could be one way of giving
employees an additional, Western-style benefit
(although it would be subject to taxation in certain
cases).
Historically, it has been common practice
for employers to provide meals during the day due
to the lack of external catering facilities readily
available to employees. Daycare, housing
and transportation benefits are fairly common
in Russian enterprises, especially in the case
of large enterprises in isolated locations.
Health and Safety
Health and safety standards are in force and require
negotiation and approval by the workforce. New
enterprises must pass health and safety inspections,
and new machinery must also pass such
inspections before being put into use. Legislation
mandates health insurance for employees and
allows for determination of liability and
compensation for injury. In practice, Russian health
and safety standards are not yet as stringent
as in many countries and are not always applied
as rigorously as they could be.
Further Amendments to the Employment Code
Please note that the Russian Federation
Employment Code was recently amended. The
amendments will come into force in October 2006.
Overall, more than 300 articles of the Russian
Federation Employment Code were amended and
more than 10 new articles were introduced.
Most of those amendments are of a technical nature
and aim at improving the wording
of the Employment Code in order to eliminate
existing controversies and inaccuracies and to
ensure better application of the Employment Code.
In particular, the following major amendments should
be noted:� Provisions of the Russian Federation Employment
Code with respect to rules for calculation of the
duration of working time for moonlighters were
amended and became more flexible.� If an employment agreement with an employee
acting as the sole executive body is terminated in the
absence of any wrongdoing by the employee, the
employer is obligated to pay the dismissed employee
a special severance allowance of three months'
average salary. This is the minimum amount
of severance allowance and may be increased by an
employment agreement with the respective
employee.� A list of instances when employees may have to
work on days off and non-working holidays without
their prior consent was introduced.� Provisions concerning trade unions, strikes and
collective disputes were significantly revised and
amended. For example, a meeting of employees that
adopts the decision to strike shall be deemed eligible
provided that not less than half of the aggregate
number of the employees of the company
(or its branch, representative office or any other
subdivision) or the entrepreneur have attended the
meeting. Additionally, collective disputes defined in
the Employment Code shall be resolved by
employment arbitration decision, which shall be
binding for all parties to the dispute.
Stock Options and Other Equity BasedCompensation Plans
Liberalization of currency control legislation, which
now allows Russian citizens to purchase foreign
securities, has given multinationals operating in
Russian the long-awaited possibility of implementing
equity-based compensation plans. Although the
legislation on stock option plans and other types of
long-term incentive plans is still rather undeveloped,
especially in the area of taxation and labour law,
Russian and multinational companies have started
to introduce equity-based elements into the
compensation packages of management personnel.
It will take some time for equity-based remuneration
to become a standard part of management
compensation packages, but there is a clear trend in
the Russian market of increased use of equity-
based plans as a retention and motivation tool.
Foreign Personnel
Employment and Work Permits
According to the Federal Law "On the Status
of Foreign Nationals and Stateless Persons",
employers must obtain a special employment permit
if they wish to recruit or hire foreign workers. All
foreign employees must receive a work permit from
the migration authorities before being allowed to
work in the Russian Federation. Both permits are
required not only for foreigners working under
employment agreements, but also for those
providing services under civil law (service) contracts,
or engaging in entrepreneurial activity (except in
some cases expressly stipulated by the Federal Law
"On the Status of Foreign Nationals and Stateless
Persons").
Although Russian law does not expressly prohibit
personnel provision agreements, neither does it
expressly make provisions for them. The Russian
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immigration authorities have taken a firm position
on not issuing work permits under personnel
provision agreements. Foreign employees intending
to be seconded to Russia under personnel provision
agreements will have to make additional local
arrangements in accordance with Russian labour
law.
The Federal Law "On the Status of Foreign
Nationals and Stateless Persons" and related
legislation provide severe sanctions for violations
of migration rules, including even the deportation
of foreign employees. This last scenario could make
it difficult or even impossible for such foreign
nationals to obtain further entrance visas, while
employers would also be likely to face penalties
of up to US$10,000 and encounter complications
in processing future permits and visa requests.
Visa Requirements and Immigration Card
All foreign personnel must obtain a work visa to
enter the Russian Federation (except for the citizens
of most of the former Soviet republics and citizens
of a few other countries). Visa applications must be
supported by an invitation from the employer –
a Russian individual or a Russian legal entity.
Initially, work visas allow only a single entry to
Russia and a stay of just 90 days. After arriving in
the Russian Federation, the foreign employee must
convert her/his visa into a multiple-entry visa good
for up to one year. Having received the multiple-
entry visa, the foreign employee is allowed to leave
and re-enter the Russian Federation.
Working while on a business visa – previously
a widespread practice due to its convenience – is no
longer permitted by the migration authorities.
Russian representative and branch offices of foreign
legal entities are no longer allowed to invite foreign
citizens to Russia. Therefore, they have to apply for
invitations for their personnel through the relevant
accreditation bodies – the State Registration
Chamber or the Russian Chamber for Commerce
and Industry. These authorities only provide visa
support to the accredited employees of the
representative and branch offices. However, some
amendments to Russian immigration rules with
regard to representative and branch offices of
foreign legal entities may be introduced in the near
future, which may grant them a status equal
to that of Russian legal entities.
Every foreign employee, without exception, must fill
in an immigration card at a border checkpoint and
keep it until leaving Russia. After obtaining
mandatory registration within three days of arrival at
the place of her/his residence (registration stamped
on the back of the immigration card), a foreign
employee may reside freely in the country until
his/her visa expires. It is worth mentioning that there
are some territories in Russia of "limited access to
foreign citizens" (such as frontier zones on Sakhalin,
areas around airbases in the Moscow region or
submarine bases in the Murmansk region) which
require special entrance permission from the state
security bodies in addition to a Russian visa.
40
Russia has seen improvement in corporate
governance practices. Shareholders have asserted
their rights with an increased number of minority
shareholders and independent directors on Boards
of Directors, dividends have increased, clear-cut
schemes for their payment have been developed
and there have even been several cases
of successful legal action by investor advocacy
groups. In the area of information disclosure,
international and US accounting standards have
been adopted in a number of large Russian
companies and patterns of constant communication
with shareholders and analysts have been
developed and maintained. However, there is still
plenty of room for improvement in Russian corporate
governance practices, and in corporate transparency
in particular.
Transparency, though only one of the many aspects
of corporate governance, plays a key role in gaining
the confidence of investors and often signals
the level of overall governance standards. Russian
legislation focuses on disclosure of information
as a key element of corporate governance
based on equal access to information about
a company. The current financial and non-financial
disclosure requirements by Russian public
companies are consistent with EU and IOSCO
(International Organization of Securities
Commissions) requirements.
The average level of corporate transparency
has been steadily improving for the last several
years. Overall, Standard & Poor's Governance
Services index of transparency among the
largest by market capitalization Russian companies
(according to "Russian Transparency and
Disclosure Survey 2005") has increased to 50%
from 46% in 2004, 40% in 2003, and 34% in 2002.
The Index has increased roughly 5 percentage
points each year from the initial index in 2002.
However, there have been no dramatic
improvements in these disclosure policies in Russia
recently.
The disclosure level of Russian banks remains low,
especially in comparison with that of their
international counterparts, and is lower than the
transparency level of the largest Russian
non-financial companies.
Transparency of private ownership has slightly
decreased. The share of disclosed large private
stakes in the aggregate market capitalization
of the largest companies has decreased to 11%,
as compared to 14% in 2004, while concentration is
not decreasing. Furthermore, some
of the companies that have completed international
IPOs over the past year follow a policy of minimal
information disclosure.
A greater scope of information available in English
and broader disclosure on corporate websites are
among the improvements that have been made.
There has been no significant progress among
first-tier companies, the 54 largest by market
capitalization, where the room for improvement is
still quite substantial. Those companies that had
been public for a while and scored low
on transparency in the past tend gradually to adopt
higher standards of transparency and catch up
with the rest.
There has been a sharp increase in information
disclosure on shareholder rights and investor
relations procedures by these companies.
This appeared as a result of companies' efforts
to follow the recommendations of the Russian Code
of Corporate Conduct, which is particularly focused
on disclosures of companies' governance
procedures and shareholder rights.
The disclosure of ownership and share capital
structures has not changed substantially lasting
recent years. This disclosure reached 49% in 2005,
up slightly from 48% in 2004 and 47% in 2003.
Transparency of the ultimate beneficial ownership
of large share blocks is still a problem in Russia.
Russian companies are commonly affiliated with
each other via their shareholders, while
the shareholders do not disclose such information
for fear of antimonopoly regulations, investigations,
and corporate raiders. Only 38 out of 54 companies
disclose the identities of all their major shareholders,
Chapter 7.
Corporate Transparency
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regardless of type. While the proportion may seem
high, the aggregate share of such companies
in the total market capitalization of the studied firms
has fallen from 65% to 56%.
Financial information remains a relatively weak area
of disclosure for Russian companies. Not all
companies (43 out of 54) report their annual
financials under IFRS or US GAAP. Among those
companies that report under IFRS/US GAAP,
the weakest disclosure issues are related-party
transactions (indication of whether they are
conducted on an arm's-length basis and
the disclosure of exact terms), ownership structure
of affiliates, and disclosure of the scope of and the
fees for the services provided by the auditor.
It is worth noting that index growth was mainly
caused by progress among companies with formerly
poor absolute levels of disclosure. Some of them
still have not reached the average disclosure level
for last year.
Timeliness of disclosure by Russian companies
of financial statements according to IFRS or US
GAAP has improved. In particular, 36 of the largest
54 companies had published audited financial
statements for 2004 conforming to either IFRS or
US GAAP as of 12 August, 2005. This is
an improvement on the 26 companies
that presented such reports in 2004 for the full-year
2003 and the 20 firms presenting such reports
in 2003 for 2002.
The ownership structures of Russia's 54 largest
public companies remain highly concentrated. All
companies have at least one block holder whose
stake in the company exceeds 25%. In addition, 46
firms are (beneficially) majority-owned by a single
shareholder or controlled by a group of shareholders
that are parties to a formal shareholders agreement.
As a result, 61% of the aggregate market
capitalization of the 54 firms is represented by
blocking or controlling stakes.
This is a marginal increase on 57% in 2004.
Russia is one of the world's most lucrative
emerging markets, but still needs improved
corporate governance practices to attract
foreign investors. Transparency is an important
intangible asset, allowing the most transparent
companies to enhance their market value.
Despite improvement in the transparency of
governance practices, much still needs to be done.
Joint effort by the government, companies
and investors is needed for the improvement
to be notable.
42
PricewaterhouseCoopers in the Russian Federation
About PricewaterhouseCoopers
� A global organisation with offices in 148 countries
� One of the world's leading employers of highly skilled professionals – more than 130,000 staff all
over the world
� Largest professional services firm – FY 2005 aggregate gross revenues of PwC firms were
US$20.3 billion, including expenses reimbursed by clients
� Unmatched portfolio of client companies – serving 31% of the Global Fortune Global 500 in 2005
� An organization that recognizes and meets its responsibilities to a broad community of stakeholders
Our mission is to build public trust and enhance value for our clients and their stakeholders. By building
trust we support the efficient and transparent functioning of financial and commercial markets around
the world. By enhancing value we help companies achieve their business objectives. We pursue this
mission through industry-focused assurance, tax and advisory services.
Key facts about PricewaterhouseCoopers Russia
� First established in Russia in 1913, and renewed its presence here in 1989
� Leading audit and consulting group in Russia by 2005 results, according to Expert RA rating agency
� Named the National Tax Firm of the Year and the National Transfer Pricing Firm of the Year by International
Tax Review
� Offices in Moscow, St. Petersburg, Yuzhno-Sakhalinsk and Togliatti
� More than 1,700 professionals, who are focused on providing you with constructive and efficient
advice geared towards the specific needs of your business
� Key lines of PricewaterhouseCoopers services in Russia are audit, advisory, tax and legal services
� We have over 2,000 clients in Russia, including 56% of Russia's 100 largest companies,
which generate 73% of the list-members' total revenues
43
*connectedthinking
Connected to Russia*
We believe that our success and prosperity are closely related to the success and prosperity of local
communities, where our offices operate. PwC local strategy is called Connected to Russia. Our activities
show our commitment to Russia:
� We extensively consult the Russian Government, Russian Union of Entrepreneurs & Manufacturers
and various industrial and business associations on such topics as:
- Tax & legal issues
- IFRS
- Corporate Social Reporting
- Corporate Governance
� We provide various opportunities for professional education and extensive training to our staff
� We have created a special PwC University programme for experienced professionals,
joining PwC
� We are a member of various public and professional organisations, such as the Russian Auditors'
Chamber, Institute of Professional Accountants of Russia, Manager's Association of Russia,
Association of International Pharmaceutical Manufacturers, AmCham, RBCC, AEB, CERBA, German
Economics Union, U.S. Russia Business Council, Swiss Business Hub, CERA and Rotobo (Japanese
association on trading with Russia and Eastern Europe)
� We realize our community activities in line with PricewaterhouseCoopers mission in Corporate Social
Responsibility that is to make a positive and lasting impact in the community in which we live and work.
In Russia we focus on 3 major areas – education, culture and children. We engage in these areas through
our people's personal and collective endeavors and through considered interaction with various charity
organisations.
For more information, please, contact:
Mike Kubena
General Director, Managing Partner
Nick Brasington
Partner, Assurance Services Leader
Steven Snaith
Partner, Tax and Legal Services Leader
Nick Hawkins
Partner, Advisory Services Leader
John C. Gross
Partner, Energy, Utilities & Mining Practice Leader
Richard Munn
Partner, Financial Services Practice Leader
Tony Antoniou
Partner, Retail, Consumer & Industrial Products,
Telecommunications Practice Leader
Nathan Birchall
Partner, Technology, Infocom, Entertainment & Media Practice Leader
PricewaterhouseCoopers
Kosmodamianskaya nab., 52, bldg. 5
115054 Moscow, Russia
tel: +7 (495) 967 6000
fax: +7 (495) 967 6001
www.pwc.ru
Legal Disclaimer
The information contained in this Guide is for general guidance on matters of interest only.The application and impact of laws can vary widely based on the specific facts involved.Given the changing nature of laws, rules and regulations, and the inherent hazardsof electronic communications, there may be out-of-date, missing or inaccurate informationcontained in this Guide. Accordingly, the information in this Guide is provided withthe understanding that the authors are not hereby engaged in rendering legal, accounting,tax, or other professional advice and services. As such, it should not be used asa substitute for consultation with professional accounting, tax, legal or other competentadvisers. Before making any decision or taking any action, you should consulta PricewaterhouseCoopers professional.
While we have made every attempt to ensure that the information contained in this Guidehas been obtained from reliable sources, PricewaterhouseCoopers is not responsible forany errors or omissions, or for the results obtained from the use of this information. Allinformation in this Guide is provided "as is", with no guarantee of completeness,accuracy, timeliness or of the results obtained from the use of this information, andwithout warranty of any kind, express or implied, including, but not limited to warranties ofperformance, merchantability and fitness for a particular purpose. In no event willPricewaterhouseCoopers, its related partnerships or corporations, or the partners, agentsor employees thereof be liable to you or anyone else for any decision made or actiontaken in reliance on the information in this Guide or for any consequential, special orsimilar damages, even if advised of the possibility of such damages.
www.pwc.ru
Your worlds Our people*
*connectedthinking
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