This Q&A provides country-specific commentary on Practice note, Structures: international joint ventures, and forms part of our international joint ventures transaction guide.
The most common structure is a corporate entity.
At the end of 2010 the President of the Russian Federation recommended a set of amendments to the Russian Civil Code. The first edition of the special Bill on amendments to the Civil Code provided that the new rules would come into force on 1 September 2012. However, its adoption has been postponed for the time being, due to the ongoing discussion on specific definitions included in the Bill.
The proposed changes, if adopted, would have a significant effect on the legal status of corporate entities. One of the most debated provisions is the introduction of new organisational principles for corporate entities. The proposals have prompted heated discussion, especially among the Russian legal and business community.
However, the Bill was passed at first reading on 27 April 2012, but the date of the second reading has been repeatedly postponed. The earliest possible date of implementation is March 2013.
Russian law provides for different forms of corporate entity. The most common and corporate forms for a joint venture are:
Limited liability company (LLC), where participation is based on participation shares.
Joint-stock company (JSC), where participation is based on equity shares. There are two types of JSC: open JSC (OJSC) and closed JSC (CJSC). OJSCs are public companies, while CJSCs have no right to offer their shares to the public. Other differences between CJSCs and OJSCs are that CJSCs may only have a limited number of shareholders; CJSC shareholders have pre-emptive rights in respect of shares offered for sale; the public disclosure requirements imposed on a CJSC are more limited.
Unlike JSCs, LLCs have their own distinct features. LLC participation shares are not treated as securities, and no specific share issue procedure applies to LLCs. However, a transfer of LLC shares to third parties is more complicated as the transfer contract is subject to public notary verification. This includes, for example, a sale or a pledge. It should be noted that public notaries generally prefer conventional forms of LLC shares transfers, and are keen to avoid verification of any more complex transfer forms such as for example a conditional purchase.
If a shareholder (participant) decides to withdraw from an LLC, it is entitled to the book value of his participation share (determined as a proportion of the LLC’s net assets), whereas a JSC shareholder intending to withdraw is only entitled to the nominal price of his shares. Under current legislation, the charter of an LLC may prohibit any withdrawals. In this event, a participation share can be sold by the participant to a third party.
It should be noted, however, that the charter can also prohibit a sale of the participation share to a third party. When such a restrictions is in force, the participation share can be sold to the other participants in the company, and if the other participants refuse to buy the share, the company will be under an obligation to buy out the share at its actual price within three months of the date the sale request was made.
Each form of corporate entity has its advantages and disadvantages, and which form is most likely to be used for a joint venture should be determined on a case-by-case basis.
Russian corporate law does not provide maximum capital requirements. There are, however, minimum capital requirements currently RUB10,000 (as at 28 November 2012, US$1 was RUB31.1) for LLCs and CJSCs, and RUB100,000 for OJSCs. Special minimum capital requirements exist for companies operating in the banking and insurance fields, and some other companies.
A JSC may issue additional shares only up to a specified amount set out in its charter (the authorised shares). Therefore, as a general rule it is advisable to amend the JSC charter before issuing additional shares. The JSC charter can also be amended for this purpose with the same decision which authorises the additional shares issue.
The forms of non-cash consideration for shares in JSCs and participation shares in LLCs are limited to securities, other assets, property rights and other rights having monetary value.
The company's charter may prohibit certain types of assets being contributed as consideration for the shares/participation shares.
Slightly different procedures apply to non-cash consideration in JSCs and LLCs.
In JSCs the value of non-cash contributions paid for shares at the time of incorporation of the company is determined unanimously by the founders, and for additional shares, by the board of directors (supervisory board), in either case based on a valuation made by an independent valuer. The value determined by the founders or the board may not exceed the value determined by the valuer. If there is an additional issue of shares, it is also possible under certain circumstances to set off any existing mature debt against payment for the company's shares.
In LLCs the value of non-cash contributions must be unanimously approved at the general meeting of participants. If the nominal value of the participation share to be paid for in a non-cash form exceeds RUB20,000, an independent valuer must be retained to value the non-cash contribution. The nominal value of the participation share to be paid for in a non-cash form may not exceed the value determined by the valuer.
Under statutory rules, the management bodies for corporate entities are:
The General Meeting of Shareholders/Participants (mandatory for LLCs and JSCs). The General Meeting may be annual or extraordinary; the annual General Meetings must be held once a year, within the time frames determined by the company's statute
The Board of Directors (mandatory for OJSCs with more than 50 shareholders/participants, optional in other cases). The Board of Directors in a JSC must consist of minimum five directors (no such minimum requirements for LLCs). A director may not transfer its voting right to any other person (including another director). The General Director may not be chairman of the Board of Directors, and the members of the Management Board, if any, may not comprise more than one fourth of the Board of Directors.
The General Director (mandatory for LLCs and JSCs). The General Director has the exclusive right to enter into transactions with third parties in the company’s name. It is not possible to deprive the General Director from this right in whole or in part, however, the right may be restricted by certain internal procedural regulations. The functions of the General Director may be assigned to an external management company.
The Management Board (optional).
The Auditing Committee (mandatory for JSCs, and for LLCs with more than 15 participants). Neither the General Director nor any member of any other company’s management body may be a member of the company's Auditing Committee. The functions of the Auditing Committee in an LLC may be assigned to an external independent auditor. In JSCs an external independent auditor must be appointed, to work alongside the company’s Auditing Committee.
The Returning Board (mandatory for JSCs with more than 100 shareholders). In OJSCs with more than 500 shareholders the functions of the Returning Board are performed by the company’s registrar (keeper of the list of the company’s shareholders).
The structure and functions of all corporate management bodies must be laid down in the company’s charter, the principal funding document of a corporate entity.
Managers or directors of a company must be at least 18 years old. Only an individual (rather than a legal entity) may hold certain positions in corporate bodies. Also, there are restrictions for businesses operating in certain sectors. For example, a General Director or Chief Accountant in companies operating in certain businesses sectors (for example, insurance companies) must be a Russian citizen. In addition, the employment of foreign individuals in management positions is subject to certain immigration control procedures involving both the company and the foreign individual. Therefore, it is generally advisable to appoint a Russian citizen as a first General Director in a newly incorporated company.
Also, an individual may be disqualified by a court from occupying management positions if he or she has been convicted of certain criminal or administrative offences.
Typically, all directors are appointed by shareholders/participants. The number of the directors each shareholder/participant is entitled to nominate usually depends on the respective ownership interest of that shareholder/participant. Certain specific provisions, stipulated at the shareholders/participants' discretion, may be included in the shareholders’ agreement (participants’ agreement). In relation to JSCs, a special mechanism of cumulative voting is in place, which increases the chances for minority shareholders to have their nominees on the board. Employees (unless they are also shareholders) do not have the statutory right to appoint directors.
The concept of a "partnership" under Russian law differs from the common law understanding of this term. Recent legislation has introduced two new types of partnership, each regulated by a specific statute: economic partnerships and investment partnerships. They coexist with the original partnerships, “simple” partnerships and partnerships-legal entities (general and limited).
Therefore, there are currently two categories of partnerships in Russia: partnerships-legal entities (economic, general and limited partnerships) and contractual partnerships (simple and investment partnerships).
Under Russian law, general, limited and economic partnerships are incorporated entities. The only partnerships which are not a corporate entity are "simple" partnership formed by parties to a joint activities agreement and investment partnerships. However, these partnerships under Russian law differ from the common law partnership in that no new firm or business entity is formed, and the partnerships are in fact only a contractual arrangement.
In order to establish partnerships-legal entities, the partners need to enter into a foundation agreement. The general partnership has to be registered with tax authorities, statistics authorities, pension fund, mandatory insurance fund and social insurance fund.
A "simple" partnership is created when two or more parties execute a joint activities agreement. There are no registration or filing requirements, but the assets contributed to the joint venture by the "simple" partners must be capitalised on a separate balance sheet (to be maintained by the partner in charge) and accounted for separately.
By contrast, investments partnerships are more strictly regulated. For example, there is a requirement to keep separate balance sheets, a special obligation for the managing partner to open a bank account and to account for tax payments (Law On Investment Partnerships).
Generally, partners who are natural persons must be at least 18 years old. Only legal entities or natural persons registered as individual entrepreneurs may be partners in general, investment and "simple" partnerships or general partners in limited partnerships. Both natural persons and legal entities may be limited partners in limited partnerships.
As under Russian law both general partnerships and limited partnerships are incorporated entities, they are themselves liable for their obligations. Only if their assets are insufficient to satisfy creditors’ claims, would general partners have to step in. In such a case, the general partners would be jointly and severally liable for the outstanding obligations of the partnership. Limited partners would not be liable for the limited partnership’s obligations as their liability is limited to their contribution to the partnership’s charter capital.
Economic partnerships are regulated in a similar way to LLC and JSC with regard to liability. The law On Economical Partnerships does not directly provides for personal liability of partners.
As for a "simple" partnership, no claims may be made against it or its business, as, again, there is no entity. Claims can only be made against the "simple" partners, that is, parties to the joint activities agreement. Their liability for claims arising out of commercial activities of the "simple" partnership will be joint and several. If claims are made, the partners will be liable to the full extent of all their assets, except, in relation to individual entrepreneurs, for items from a statutory list of assets which may not be attached (minimal furniture, personal belongings, food, occupational tools, and so on).
Liability in investment partnerships under contractual (if the parties to the contract are not entrepreneurs) and non-contractual obligations is borne by all partners on a joint and several basis.
If the parties to the contract are entrepreneurs, the non-managing partners are all liable pro rata and within the limits of their shares, and do not incur personal liability.
As far as general and economic partnerships are concerned, the question is not relevant as under Russian law these types of partnerships are companies.
As for the contractual partnership, this structure is not widely used; however, it is sometimes used in oil and gas, construction and other projects. Hypothetically, the parties could choose a "simple" or investment partnership to avoid incorporation and registration formalities, since Russian legislation treats "simple" and investment partnerships not as entities but as a contract between entities (and/or individual entrepreneurs). The parties to a contractual partnership agreement should maintain separate tax and accounting records. Certain provisions of the tax rules relating to "simple" and contractual partnerships are however vaguely drafted and, therefore, practical difficulties relating to the taxation of "simple" and investment partnerships cannot be excluded.
The tax rates for contractual partnerships are currently the same. In relation to the distribution of profits, profits received by the contractual partnerships are taxable at the level of the partners (parties to the partnership agreement) and not at the level of the partnership. Accordingly, such profits are not subject to dividend withholding tax which would apply in the case of a dividend payment to shareholders/participants of a JSC or LLC. This means that the profits received by the contractual partnerships are subject to 20% profits tax in the case of partners which are Russian legal entities and/or foreign legal entities having permanent establishment in Russia and subject to 20% profits withholding tax in the case of partners which are foreign legal entities without permanent establishment in Russia. However, in the latter case, the 20% tax rate can be reduced (potentially to 0%) on the basis of any applicable double tax treaty.
Losses suffered by the contractual partnerships cannot be utilised by the partners.
Partnerships – legal entities (general, limited and economic partnerships) are subject to the same degree of taxation as contractual partnerships, but at the partnership level. In addition, dividend withholding tax applies to the partners.
The tax rate is 9% if the partner is a Russian legal entity, and 15% if one of the partners is a foreign legal entity. The tax rate for a Russian legal entity is reduced to 0% if the partner’s share in the partnership is no less than 50 % for at least one year of the date a dividends payment was approved.
Tax at the rate of 13% applies to individuals resident in Russia, and 15% to non-resident individuals.
As mentioned above, under Russian law the joint activities agreement (which we understand to be equivalent to a contractual joint venture) is a "simple" partnership, and if such agreement envisages commercial activities, the parties to it will be jointly and severally liable for all their joint obligations.
As mentioned above, under Russian law the joint activities agreement (which we understand to be equivalent to a contractual joint venture) may constitute an essential document for the contractual partnerships (“simple” and investment partnerships). In relation to “simple” partnerships, if such agreement envisages commercial activities, the parties will be jointly and severally liable for all their joint obligations.
As to the investment partnerships, the general rule is that each partner is liable jointly and severally. However, when the liability arises from a tort or any other non-contractual obligations, the liability is not limited to the partner’s share in the partnership.
Yes, but it would be an incorporated entity. The limited partnership consists of:
General partners who conduct business on behalf of the partnership and are liable for the partnership’s obligations with all their assets; and
Limited partners, who are not engaged in the business of the partnership and are only liable for their obligations to the extent of their contribution to the partnership’s charter capital.
The general partners need to enter into a foundation agreement. The limited partnership will have to be registered with tax authorities, statistics authorities, pension fund, mandatory insurance fund and social insurance fund.
A person may be a general partner in one partnership only (whether that partnership is a general or limited partnership).
Only general partners manage the limited partnership. Each general partner can represent it, unless the foundation agreement provides that:
The partnership's business is conducted jointly by all general partners (in which case each transaction would require all general partners' consent); or
The representation powers are granted to a particular partner or partners.
Limited partners may not participate in the management or business of the partnership and may only represent it pursuant to a power of attorney. Nor can they challenge actions of the general partners relating to the management of the partnership.
Not relevant. Under Russian law, the limited partnership is an incorporated company.