Transcript Partnering with Russian business

International business
partnerships in Russia
By Maxim Popov
30 March 2004
Russian Investment
Climate:
PROVES CHANGING FOR BETTER
Snapshot of changes
One of BP’s landmarks
in Russia
1998: need to access
your account in this
bank?
2001: Moscow
CityTower
Gasoline line
IKEA’s flagship
store in Moscow
His parents received
this bread in place of
wages
Line at the Children’s
Store
Internet café in
Samara
Business center
The Name of the Game
Any typical approach characterising
a successful investment?
• Apply same care and diligence as
in other countries
• Conservative Feasibility Study
• Backing Top Management
• Home Office People on the
Ground
• Ensure Compliance with local
rules from Day One
• Selection of Russian
Management
• Emphasis on Distribution
Network
Specific issues for foreign
investments
To invest or not to invest:
Yes
Russian market
Manage environment
Local competitor
Low up-front
investment
Long return on
investment
No
Export market
Stable environment
Foreign competitor
High up-front
investment
Short return on
investment
Specific issues for foreign
investments
Are Russians really afraid/hostile of foreign
companies/control?
• Not afraid but unwilling to give away control
• Foreign ownership often means transparency
• Perception – foreign management does not automatically mean
success
Specific issues for foreign
investments
If you have 5 million USD to use for:
•
•
•
•
76% of shares in a small size plant in Russia
51% of shares in a medium size plant
26% of shares in a big plant
Something else
What would be your choice?
Create a 100% controlled subsidiary
Specific issues for foreign
investments
Ways of minimising risk/downside when establishing
a company
• Contractual relationship is preferable compare to ownership
participation
• Avoid JVs unless there is a good business reason to
enter into one
• Tight cost control
• Build personal relationships
• Make sure all formalities are complete
Specific issues for foreign
investments
Minimum requirements/measures for an
agreement/business deal
if JV is required:
• “Waterproof” contracts, by-laws, etc.
• Availability of home office resources to support
the deal especially at the early stage
• Strong local support from advisors
• Existence of the general (but flexible) plan
• Maximum ownership control (at least have a
blocking vote)
• Financial control
• Staff control
Legal Issues
• Options for Establishing
Presence in Russia
• Major Operational Legal
Issues
Operating in Russia
• formal registration in Russia may or may not be required depending
on extent of operations in Russia
• may need to be registered in Russia for tax purposes if have a
permanent establishment in Russia
• establishing a legal presence in Russia may be necessary for
operational reasons and legal recognition
• a number of options for establishing a legal presence in Russia
Options for Operating in Russia
Separate Legal
Entity
Russian
Subsidiary
Limited Liability
Company ("LLC")
No Separate
Legal Entity
Representative
Office
Joint Stock
Company ("JSC")
open JSC
closed JSC
Branch
Branch Office or Russian
Subsidiary?
Branch/Rep Office
• branch office and
representative office often
used for same purposes
• less regulatory control
• bookkeeping simpler
Russian Subsidiary
• may be necessary for joint
ventures
• certain operations may
require Russian entity
• tax planning
• limiting liability of nonRussian parent
LLC vs. JSC
General Features of LLC:
• based on French model
• simpler management
structure and greater
flexibility (e.g. fewer
management bodies
required)
• more private form of
company
General Features of JSC:
• similar to common law
system
• an open JSC must make
public its annual report,
balance sheet and profit and
loss statement
• subject to regulation under
the Federal Law on the
Securities Market
Joint Venture Associated Risks
• Always risk when enter into joint venture with other
partners
• Russia has historically posed some significant joint
venture risks, many due to problems with corporate
governance, including:
– dilution of shareholdings through issue of new shares
– violation of shareholders rights on corporate reorganizations
– asset stripping (moving profitable assets to other companies
and leaving existing shareholders with liabilities)
– transfer pricing: including funneling off funds to corporations
not owned by all shareholders
Dispute Resolution
Dispute Resolution
•
still major problem for foreign investment in
Russian:
•
•
•
•
•
court system can be slow and corrupt
Russian laws have many holes and uncertainties which
makes resolution of disputes more difficult
will require major revision
arbitration is preferred route for most western
parties using recognized arbitration rules
Russia is a party to the New York Convention which
permits enforcement of foreign arbitration orders
from Convention members
Tax highlights
• Assets Received from the 50% Shareholder Are
Not Subject to Profits Tax
• Income Gained From the Sale of Shares by
Foreign Shareholder Is Not Subject to
Withholding Tax (Except When More Than 50% of
Assets Is Immovable Property)
• Reorganizations Are Not Taxable Events
(Mergers, Associations, Split-ups, Spin-offs)
Dividends
• Withholding rates:
– 6% for Russian organizations and resident individuals
– 15% for foreign organizations
– Double tax treaties
• Dividends paid to Russian recipients to extent
received from other entities are tax free (Russian
holding structures are possible)
Contact information
Maxim Popov, attorney-at-law
Internet:
E-mail:
Tel:
Fax:
www.maximpopov.com
[email protected]
+7(812)9340975
+7(812)2349396