Doing Business In: Russia
Paradigma Law FirmView Firm Profile
PARADIGMA Law Firm was established in 2005 in Russia by a group of qualified and experienced lawyers who have gained substantial expertise while working for large companies and government bodies. The firm started its professional activity as a boutique law firm specializing in domestic and international disputes resolution.
PARADIGMA has been involved in most business conflicts in Russia and abroad, and acted as litigation and strategy advisors to in-house legal departments of major Russian and international corporations. Participating in business conflicts PARADIGMA gained a wealth of experience and expertise in all aspects of different business development and accomplished legal risks mitigation.
Today PARADIGMA provides a wide range of legal services for business development and professional maintenance of its clients’ businesses as well as advises its clients on current affairs and support of comprehensive projects, inter alia, those governed by multiple jurisdictions. In addition, PARADIGMA often acts as a strategic legal counsellor for foreign companies starting and developing their activities in the Russian Federation and protect their interests in legal disputes.
PARADIGMA is a recognized expert in bankruptcy (insolvency) including cross-border insolvency proceedings. There are lawyers in the firm who are registered as bankruptcy receivers, and they can independently manage bankruptcy processes in Russia.
Currently PARADIGMA is a solid team of professionals offering consulting and legal services throughout the Russian Federation and abroad. PARADIGMA has offices in Moscow (Russia), Yakutsk (Russia, the Far East) and London (United Kingdom). PARADIGMA has broad connections and long-term partnerships with legal practitioners from many countries. PARADIGMA Law Firm is a member of various professional associations: International Chamber of Commerce (Paris), Moscow Chamber of Commerce and Industry, Leningrad Region Chamber of Commerce and Industry in Russian, Bulgarian Chamber of Commerce and Industry, Russia-China Law Society, Eurasia Business Union and Deutsch-Russische Juristenvereinigung. This greatly enhances its ability to provide consulting and legal services in international markets and ensure the successful representation of clients outside national jurisdiction
What makes us different?
- Successful litigation practice – we have a team of experienced litigation lawyers who have in-depth knowledge of foreign and domestic legal processes.
- The basis of “manual control” basis allows us to take into account specific needs of our clients and protect their interest in a timely manner.
- The principle of “fundamental analysis of the case”: PARADIGMA always develops a unique strategy of legal actions in relation to each case. The absence of a template makes it impossible for an adversary to predict our actions and, therefore, anticipate them.
- Confidentiality and security – PARADIGMA has developed a hierarchy of access rights to project information.
- Conscientiousness and creativity in our work – are two basic principles that make us special in the legal services market.
KEY TRANSACTIONAL PRACTICES
- corporate and company law;
- commercial law;
- mergers and acquisitions,
- international transactions support;
- private equity;
- domestic and international dispute resolution;
- insolvency and debt collection;
- banking and finance;
- data protection law;
- real estate transactions,
- protection of intellectual property.
Doing business in Russia
According to the World Bank Group’s Doing Business-2019 rating, Russia ranks in 31st place, having climbed up 89 positions from 120th place in seven years’ time. This is the best 2012-2019 performance among all the countries surveyed. Russia managed to enter the Top 100 in all 10 topics of Doing Business-2019 rating. This illustrates that Russia is strongly committed to enhancing the business environment.
Russia is seeking to increase its attractiveness for investors since the Russian business suffered after the introduction of EU and US sanctions, the financial crisis of 2014-2015 years and dramatic depreciation of the Russian ruble. In this regard, the government is currently conducting legislative reforms.
The procedure of establishing legal entities and acquiring rights to real estate has been simplified: today it is possible to conclude mergers and acquisitions and effectively implement investment projects under the Russian law including protection of warranties and representations. More and more investors choose to conclude cross-border transactions under the Russian law.
At the same time, with the introduction of anti-Russian sanctions, the government is setting a course to ensure protection of national interests. When carrying out activities in areas of strategic importance in Russia, the business is granted particular benefits and preferences. In addition, the government is taking measures to prevent withdrawal of money from Russia, so the tax authorities investigate all operations within international holdings and their subsidiaries in Russia. The number of tax audits has increased and foreign parent companies should be as careful as possible in optimizing taxation using companies located in Russia. In addition, rules were introduced for mandatory repatriation of funds to Russia withdrawn for the needs of foreign companies, which makes it difficult to use financing from Russian companies by foreign ones within a group of companies.
The state encourages import substitution strategies and localization of production in the food, consumer goods, pharmaceuticals and information technology sectors. Special investment contacts have been established, technology parks and special economic zones are developing.
Modern post-soviet Russian legal system has many features of European continental law but we cannot say that it fully fits into the Western legal system. Before the socialist revolution (1917), Russian legal system borrowed a lot from German legal system and formally could be included into the German sub-branch of the continental law. Since the October Revolution Soviet lawyers decided to find their own unique way in law and followed this path for at least 75 years, they tried to find their own identity and to create soviet socialist law in Russia. After these attempts failed, Russia tried to come back to its roots – to the European system of law.
From the formal point of view, the Russian law system is closer to the Roman-German law than to the Anglo-American one. The Russian Federation has a civil law system. The Russian law includes both codified legislation (for example, the Civil Code and the Criminal Code) and other laws, which, as a rule, must be consistent with the relevant codes. The legislation has supreme juridical force in comparison with bylaws and other sources of law. However, the Constitutional Court has a right to invalidate laws that are unconstitutional.
System of justice. Justice is administered in the Russian Federation only by courts – the judicial power acts independently from the legislative and the executive powers. Justice is administered in the forms of constitutional, civil, administrative and criminal proceedings.
Currently, Russia’s judicial system is composed of the Constitutional Court of the Russian Federation, the Supreme Court of the Russian Federation, federal courts, constitutional (charter) courts, Commercial (Arbitrazh) courts and justices of the peace of constituent entities of the Russian Federation.
Commercial (Arbitrazh) courts administer justice in the sphere of entrepreneurial and other economic activities. The system of commercial courts is composed of three elements: commercial courts of the constituent entities of the Russian Federation (first instance), appellate commercial courts (appellate instance) and commercial courts of circuits (cassational instance).
There is a specialized court – the Intellectual Property Rights Court – within the system of commercial courts.
In Russia, it is also planned to establish an Investment court that will be designed to protect the interests of investors. We believe that it will be done in the near future.
Case law can be recognized as de facto source of law. This means that judgments by the Constitutional Court that contain interpretations of the law bind all courts, state agencies, legal entities and individuals. Supreme Court judgments are also binding on the lower courts to ensure uniformity of legal practice.
Arbitration law. Law of the Russian Federation No. 5338-1 dated 7 July 1993 on International Commercial Arbitration is the main act governing international commercial arbitration where the seat of arbitration is in Russia (hereinafter – “law on ICA”). The law on ICA provides for classical concurrent jurisdiction of courts and arbitral tribunals to order interim measures in international arbitration proceeding. The law of ICA is based on the UNCITRAL Model Law 1985, however, most of the progressive amendments of UNCITRAL Model Law, including those relating to interim measures, were not implemented to the law on ICA.
Since 2016, only four Russian arbitration institutions have the right to arbitrate in the Russian Federation. Foreign arbitral institutions are eligible to operate on the territory of Russian Federation in case of obtaining permission issued by the Russian government. However, to date, none of the foreign arbitral institutions has applied to the Russian Government in order to get the license.
Russia recognizes decisions of international commercial arbitration, as a rule, but in practice there are certain peculiarities. According to the Russian law, there is a special procedure for enforcing international arbitration awards: they are enforced by the state Commercial (Arbitrazh) courts of corresponding constituent units. As a rule, a foreign arbitral award shall be enforced if the award does not contradict public order of the Russian Federation.
Despite the fact that the Russian legislation does not limit the list of possible interim measures that can be granted by court, it should be borne in mind that there is a great risk that an application for interim measures based on foreign arbitration award will not be granted by the Russian court. In particular, we are talking about such interim measures as security for costs, anti-suit injunction and interim payment
Current opportunities & future prospects
Russia is the world’s largest country in terms of territory, with a consumer market of over 140 million people, vast natural resources, a highly educated workforce, and technologically advanced research and production capabilities. Russia has tremendous growth potential. Investment opportunities exist in every region and in every sector of Russia’s economy, with a wide array of government institutions, instruments and investment programs, as well as strong support for investors at all levels – federal, regional and municipal.
Russian Special Economic Zones are growing industrial, technology, logistics and touristic territories with special benefits and incentives for investors.
Taxation in Russia is one of the most progressive spheres of state regulation. Russia has signed 89 double taxation avoidance agreements, which provide for a reduction in the dividend tax rate to 5% and to 0% for other income. At the same time, tax authorities actively control Russian and foreign companies on the matter of fulfilling the terms for applying these tax benefits. After Russia’s accession to the Multilateral Competent Authority Agreement on Automatic Exchange of Financial Account Information and the system of automatic exchange of information, the Russian tax authorities promptly receive reliable information about investors from foreign jurisdictions. Considering this fact, a large number of disputes have arisen between foreign companies and tax authorities on the matter of additional tax payment – due to non-compliance with the terms for application of tax benefits.
Tax governance is becoming increasingly consistent with the international approaches, integrating the country’s fiscal system into the global tax framework. Favorable tax regime for new investments has been set up in Special Economic Zones and Priority Development Territories.
Special economic zones
A number of special economic zones have been created for the development of regions and attraction of investments in promising sectors of the economy in Russia. Each of these zones is clearly limited by territory, has a special legal status and a certain set of benefits for its residents. There are industrial, innovative, port and tourist zones. Special economic zones were created in the Republic of Tatarstan, in Lipetsk, Samara, Sverdlovsk, Pskov, Kaluga, Astrakhan, Moscow, Tula, Voronezh regions, in the cities of St. Petersburg, Sochi and other regions of Russia. There are benefits in relation to VAT, income tax, property tax, customs duties and insurance premiums that are introduced for the special economic zones.
There are two territories in Russia – Russky Island (Primorsky Krai) and Oktyabrsky Island (Kaliningrad Oblast) – that represent the Russian equivalent of foreign offshore zones. There it is possible to redomicile companies applying a minimum tax burden and with a comfortable legal regime. Companies wishing to redomicile in these zones and to have the tax benefits must meet the four key requirements: they must be registered before 1 January 2018, conduct their activities in the territory of Russia, accept investment commitments within the country in the amount of not less than 50 million within six months and conclude a special agreement with the governing structures.
Entities registered in the offshore zones are entitled to use special rates on income tax (0% on income received as dividends on their own shares and 5% on income received on dividends of shares of other public international companies) and enjoy the status of non-residents in terms of currency legislation tax control. The entities will also be able to use a more flexible corporate legal regime, keep part of the company information confidential and will be able to use the services of special multifunctional centers providing easy interaction with public authorities.
Personal data protection
In Russia personal data of citizens are protected in accordance with international standards and best practices, therefore, the rules for their protection are strictly regulated. All companies that collect personal data of Russian citizens must use a database physically located in Russia for this purpose and process personal data based on the person’s consent.
The Supervisory Authority is the Federal Service for the Supervision of Communications, Information Technology and the Media (Roskomnadzor). Currently, Roskomnadzor actively monitors compliance of protection of personal data with legislation, especially the compliance by foreign companies. Over the past few years, several high-profile cases have been brought to prosecute foreign companies for violating personal data protection laws and prohibit their business activity in Russia.
Protection of the rights of foreign investors
Russia supports investment through legal, economic and administrative mechanisms. The Federal Law number 160-FZ «On Foreign Investments in the Russian Federation» dated 9 July 1999 defines state functions related to the development of the framework and the implementation of state policy regarding foreign direct investment, the attraction of foreign direct investment and Russia’s compliance with obligations as a result of international treaties.
Foreign capital attracted to the national economy and effectively used, on the one hand, has a positive effect on economic growth and contributes to the integration of Russia into the world economy. The lack of significant competition from Russian business entities, cheap labor, an extensive market for low-cost raw materials and an active consumer market make the Russian economy attractive to foreign enterprises.
However, all foreign investors should consider the restrictions described below.
- Foreign exchange control
The national currency in Russia is the ruble. Russian and foreign companies are entitled to make settlements in any currency, but are subject to mandatory control by banks.
In Russia, there are strict rules on the repatriation of foreign and national currency by Russian companies. These rules apply to companies that provide loans to foreign companies or work with them under foreign trade contracts.
In accordance with the Russian law, Russian companies have to receive payments from foreign counterparties into their bank accounts in the currency that is due to them under the terms of concluded foreign trade agreements. Moreover, Russian companies have to ensure that foreign companies return money (an advance payment) paid for unfulfilled obligations.
To control compliance with repatriation requirements, the state obliges companies to submit information about transactions and expected repatriation terms to banks.
The bank reflects the information received in an official document. If there is recorded information that the foreign company has not performed its obligations under the foreign trade contract within the prescribed time or exceeded the expected maximum time period, then information about violation of the repatriation legislation requirements is automatically sent to the competent authorities. Liability for violation of the legislation on currency is established in the form of a fine; the fine varies from ¾ to one unpaid amount.
At present, the tax authorities are actively holding Russian companies accountable for violation of these requirements. Thus, foreign investors interacting with Russian companies need to be prepared for the fact that the Russian counterparty will require to submit a set of necessary documents to be sent to the competent state authorities – in order to comply with the above requirements.
- Land resources
Foreign investors, generally, use the same regime as Russian investors.
Foreigners, usually, have the same rights to purchase real estate as Russian citizens and companies; however, there are a number of restrictions on foreign investors with regard to the acquisition of land in border areas, the purchase of agricultural land, the acquisition of land belonging to the seaport and land acquisition without payment.
Foreign companies, as well as Russian companies, the share of foreign shareholding in which is more than 50%, may possess land plots of agricultural land only on a lease basis.
Restrictions on foreign investment also apply to the media. Thus, foreign shareholders can have up to 20% shareholding in Russian companies that owned the media outlets.
- Natural Resources (Oil and Gas/Mining)
All the mineral wealth of Russia (oil, gas, gold and other minerals), as a general rule, belongs to the Russian state, regardless of who owns the right of ownership to the relevant land plot.
In Russia, you can obtain a license for the use of subsoil – it is a state issued permission for exploration and /or extraction of natural resources. Such a license gives the owner ownership of the extracted natural resources.
- Restrictions on investment in strategic areas
Russia especially protects such strategically important areas as defense and state security, therefore the law establishes restrictions on the right of a foreign investor to enter into agreements that presuppose their control over Russian companies operating in these areas (development of armaments, military and aviation equipment, weapons production, activity, etc.).
Restrictions are expressed in the fact that in order to enter into such agreement, a foreign investor must inform the competent government agency and obtain permission from the Government Commission for the Control of Foreign Investment in the Russian Federation