Legal Guide to Business in Russia

This Legal Guide reflects the legal regulations in Russia as of March 2009. Authors: Vladimir Slyshchenkov; Anton Levin. / Настоящий Юридический обзор отражает правовое регулирование в России по состоянию на март 2009. Авторы: Владимир Слыщенков, Антон Левин.

1. OVERVIEW OF THE RUSSIAN LEGAL SYSTEM

1.1. General Information

Constitution of the Russian Federation is the supreme legislative act in Russia. It was adopted at the referendum on December 12, 1993. Laws and other legal acts must not contradict both the Constitution and the generally recognized rules and principles of international law and ratified international treaties of the Russian Federation.

According to the Constitution Russia is a democratic federative lawful state with a republican form of government. The bearer of the sovereignty and the only source of power in Russia is its multinational people.

1.2. State Powers

Legislative, Executive and Judicial branches of the state power are independent from each other. The President of the Russian Federation is the head of the state.

1.2.1. President of the Russian Federation

The President of the Russian Federation shall guarantee functioning and interaction of all bodies of state power.

The President of the Russian Federation has broad powers to manage national affairs including the powers:

(i) To appoint with consent of the State Duma the Chairman of the Government of the Russian Federation;

(ii) To adopt the resolution on resignation of the Government of the Russian Federation;

(iii) To dissolve the State Duma in cases and according to the rules established by the Constitution;

(iv) To sign and to promulgate federal laws or to return them to the Federal Assembly for a reconsideration;

(v) To issue decrees which must not contradict the effective legislation;

(vi) To exercise other powers.

1.2.2. Parliament of the Russian Federation

The highest legislative body in Russia is the Federal Assembly. It consists of two chambers: The Council of the Federation and the State Duma. The State Duma adopts federal laws and federal constitutional laws. Laws adopted by the State Duma are referred to the Council of the Federation for consideration. In case of approval the laws are presented to the President for signing and promulgation. The State Duma has also the right to ratify and denounce international treaties of the Russian Federation. International treaties shall be ratified by federal laws.

1.2.3. Government of the Russian Federation

According to the Constitution the Government of the Russian Federation exercises the executive power. Members of the Government of the Russian Federation are:

(i) The Chairman of the Government of the Russian Federation;

(ii) The Vice-chairman of the Government of the Russian Federation;

(iii) Federal ministers.

The Government exercises a unified financial, credit and monetary policy, and a unified state policy in the fields of culture, science, education, health, social welfare, ecology as well as in other spheres of the social life. Federal bodies of executive power (federal ministries, services and agencies) are subordinate to the Government.

1.2.4. Courts of the Russian Federation

Judicial system of Russian Federation is divided into three branches: the courts of constitutional jurisdiction, the general jurisdiction courts (with the system of the military courts as its integral part) and the arbitration courts.

The aim of the system of the courts of constitutional jurisdiction consists in controlling the constitutionality of acts of state bodies and of the bodies of members of the Russian Federation. There is a Constitutional Court of the Russian Federation; constitutional courts can be established in the members of the Russian Federation.

The arbitration courts in Russia resolve economic disputes and consider other cases referred to their competence. Arbitration courts specialize at property and commercial disputes between economic agents. The system of arbitration courts is organizationally divided into four levels.

(i) The first level is made up of the federal arbitration courts of the members of the Russian Federation. They include the arbitration courts of republics, territories, regions, cites of federal significance, autonomous areas and autonomous regions. They try cases as courts of the first instance.

(ii) The second level is represented by arbitration appellate courts. The arbitration appellate courts fully reexamine cases on appeals against the decisions that have been passed by the first instance courts but have not yet come into legal force.

(iii) The third level is formed by 10 federal district arbitration courts, each of which functions as a court of cassation with regard to a group of arbitration courts in one court circuit. These courts as cassation instance checks the legal compliance of the decisions passed by arbitration courts and having entered into legal force from the viewpoint of accurate application of the norms of substantive and of procedural law.

(iv) The fourth level is represented by the Supreme Arbitration Court of the Russian Federation, which is the superior judicial body for resolving commercial disputes and all other cases tried by the arbitration courts. The Supreme Arbitration Court also supervises issues explanations on the important legal issues of judicial practice.

General jurisdiction courts resolve civil, criminal and administrative cases. The system of general jurisdiction courts is as follows:

(i) At the first instance there are all general jurisdiction district courts, i.e. municipal, intermunicipal and other similar courts. The district courts are competent at all civil cases, overwhelming majority of criminal cases and cases related to administrative offences. At the same time district courts are the higher instance for Justices of the Peace which act at the territory of the appropriate judicial district. Justices of the Peace consider minor civil, criminal and administrative cases thus forming an integral part of the system of courts of general jurisdiction;

(ii) The second instance of general jurisdiction courts is represented by the supreme courts of the members of the Russian Federation, i.e. courts of the republics, regional, provincial courts, city courts of Moscow and St.-Petersburg, courts of autonomous provinces and autonomous okrugs;

(iii) The Supreme Court of the Russian Federation is the supreme judicial body for all courts of general jurisdiction, both civil and military.

1.3. International Law in the Russian Legal System

According to the Constitution of the Russian Federation generally recognized principles and norms of international law and international treaties of the Russian Federation are a part of its legal system. If an international treaty establishes rules other than established by the legislation, rules of the international treaty shall be applied.

2. CONTRACT LAW

2.1. General Information and Major Principles

The regulation of the Russian contract law has been mainly determined by the Civil Code of the Russian Federation.

The main principle of the Russian contract law is the principle of freedom of contract. This principle includes three aspects:

(i) Natural persons and legal entities enter into contractual relations at their own discretion. Compulsion to conclude a contract is permissible only in certain cases (when either the obligation to conclude a contract is established by the legislation or a preliminary contract was concluded according to which parties have agreed to conclude a contract in future);

(ii) Parties can conclude both contracts stipulated by the legislation and contracts not stipulated by the law. The civil legislation recognizes as valid all contracts which are not in contradiction with the law. Parties can combine elements of different contracts in one.

(iii) Parties are free to determine any provisions of a contract except the ones which are mandatorily prescribed by the legislation.

Some terms and conditions of a contract (the subject-matter of a contract and other terms and conditions depending on the type of the contract) are regarded as substantial terms and conditions. A contract shall be deemed as concluded only after parties have reached an agreement about these terms and conditions.

2.2. Contracts

2.2.1. Conclusion of a Contract

There are two stages of conclusion of a contract: making an offer to conclude a contract (offer) and accepting the offer (acceptance).

An offer shall be sent to one or several specified persons (except in case of public offer) and must be sufficiently detailed, i.e. it shall contain essential provisions or at least the procedure for their determination. An offer must reflect the intention of the offerer to regard himself or herself as entered into a contract with the addressee who has accepted the offer.

An acceptance is an answer of a person to whom the offer was directed in confirmation of the acceptance of the offer. The acceptance must not contain any reservations or conditions; it must be full and unconditional. A consent to accept all the provisions of the offer must be obviously follow from the acceptance.

As a general rule, a contract is regarded as concluded from the moment of receiving the acceptance by a person who has sent the offer.

Some contracts shall be deemed as concluded from the moment of transfer of subject-matter of the contract (as in the case of a loan) or from the date of state registration (as in case of contracts subject to state registration).

2.2.2. Form of a Contract

Contracts are concluded in oral, simple written form, or notarial form. A state registration of a contract is sometimes required (as in the case of lease of immovable property for a period of one year or more).

Form of some types of contracts is prescribed by the legislation (simple written form or notarial form). All other contracts can be concluded orally. As a general rule, noncompliance with the requirement of a notarial form may lead to declaring a contract as invalid. Non-compliance with a requirement of a simple written form may result in declaring a contract as invalid only in cases expressly determined by the legislation or by the agreement of the parties.

2.2.3. Model Terms and Conditions

A contract may establish that its specific terms and conditions shall be determined by model terms and conditions elaborated for this type of contracts and published in the media. In the case when a contract contains no reference to the model terms and conditions, such model terms and conditions shall be applied to the relationships between the parties as the customs of commerce provided that they comply with the definition of customs as laid down in the Civil Code. Model terms may be expressed in a form of a model contract or of another document.

2.2.4. Performance

An obligation shall be deemed as properly performed in case it is performed in accordance with the terms and conditions of the contract and in accordance with statutory requirements. In the case of absence of such terms and conditions and requirements, obligations shall be performed in accordance with customs of commerce and other usual requirements.

Under Russian law the following main principles govern performance of obligations:

(i) Proper performance of obligations. Obligations shall be performed properly in accordance with terms and conditions of the obligation and in accordance with statutory requirements. In the case of absence of such terms and conditions and requirements, obligations shall be performed in accordance with customs of commerce and other usual requirements.

(ii) Inadmissibility of unilateral refusal to perform obligations. Unilateral refusal to perform an obligation and unilateral amending terms and conditions of a contract are not allowed with the exception of the cases as stated in the law or cases provided by a contract. .

(iii) Performance of obligations in time. If a contract determines or it makes possible to determine the day of performance of the obligation or the period of time, within which it shall be performed, the obligation shall be performed at this particular day or, accordingly, at any moment within this period. If the contract does not stipulate the deadline for performance of the obligation and does not make possible to define such deadline, it shall be performed within a reasonable period of time after the obligation has come into effect. The obligation which has not been performed within a reasonable period of time as well as the obligation which is to be performed by demand shall be performed by the debtor within seven days from the day when the creditor claims its performance unless the duty of to perform in another term follows from the legislation, the contract, from customs of commerce, or from the substance of the obligation.

(iv) Joint obligations. A joint duty (a liability) or a joint claim shall arise if the joint nature of the duty or of the claim has been stipulated by the contract or it has been established by the legislation, in particular, in case of indivisibility of the subject-matter of the obligation. Duties of several debtors under the obligation related to business activities and claims of several creditors in such obligation shall be joint ones unless the contract or the legislation states otherwise. In case the debtors'' duty is joint, the creditor shall have the right to claim the performance both from all the debtors jointly, and also from any one of them separately, and both in full or in part of the debt.

2.2.5. Violation of Obligations and Legal Remedies

(i) General. A person, who did not perform an obligation or who has performed it in improper way, shall be responsible if non-performance or improper performance occurred through his fault (willful misconduct or negligence), unless the contract or the Law states otherwise. A person shall be regarded not guilty if, taking into account the extent of care and caution expected from him according to the nature and conditions of the commercial turnover, he or she has taken all necessary measures to perform the obligation properly. Absence of fault shall be evidenced by the person who has violated the obligation. Unless the Law or a contract states otherwise, the person who did not perform the obligation or performed it in improper way while carrying out business activities shall bear responsibility irrespective of his fault, unless he or she proves that proper performance was impossible because of a force-majeure, i.e. because of extraordinary circumstances which one could not prevent in the given circumstances. Such circumstances as non-performance of the debtor''s suppliers or lack of commodities for rendering the performance, or lack of necessary monetary sums at the debtor''s disposal do not constitute force-majeure under Russian law. Agreement aimed at avoidance of or limiting the liability for willful breach of obligation concluded prior to the breach is regarded as invalid. A debtor is obliged to indemnify a creditor for the damages caused by a non-performance or by an improper performance of the obligation.

(ii) Specific remedies. Penalty. If a penalty has been established for non-performance or improper performance of the obligation, according to the general rule the damages incurred by the creditor shall be compensated in the part which has not been covered by the sum of penalty. The Law or a contract may stipulate the cases: when only the penalty, but not the compensation of damages can be claimed; when the compensation of damages may be claimed in full above the amount of the penalty; when, according to creditor''s choice, either the penalty or the compensation of losses may be claimed.

Specific performance. In case of non-performance of obligation to deliver a specific thing, a creditor shall have the right to claim withdrawal of this thing from the debtor and its delivery to the creditor on the terms as determined by the contract. This right shall cease to exist if the thing has already been delivered to the third person who has the right of ownership or other right in it. If the thing has not yet been delivered, the priority right to claim the thing belongs to the creditor who acquired the claim first in time and if in cannot be determined, the right to claim the thing belongs to the creditor who has filed the claim first in time.

Statutory penalty for non-performance of monetary obligations. In case unlawful retention of the other person''s monies, refusal to return monies or delay of payment, or unlawful receipt or saving monetary sums at the expense of another person, the interest on the total amount of these monetary amounts shall be paid. The interest rate is defined by the bank discount rate, existing by the date of discharge of the monetary obligation at the place of the creditor''s residence or location. These rules apply unless other interest rate has been fixed by the law or by the contract.

2.2.6. Termination of Obligations

A contractual obligation shall be terminated in the following cases:

(i) By proper performance.

(ii) By set-off. Obligations are terminated in full or in part by setting off a similar counter-claim the moment of which performance has passed or has not been fixed and has been determined by a moment of demand. Declaration of intention of one of the parties is sufficient for an effective set-off.

(iii) By indemnity. According to the parties’ agreement, the obligation is terminated by paying an indemnity in place of a proper performance (for instance, moneys, delivery of property). The amount, term and procedure for paying indemnity shall be determined by the parties.

(iv) By novation. Obligations are terminated by the parties’ agreement on replacing the primary obligation, which existed between them, with another obligation between the same persons with a different subject-matter or a different way of performance.

(v) By freeing from a debt. Obligations are terminated by the creditor discharging the debtor from the obligations, provided that this does not violate rights of other persons with respect to the creditor''s property.

(vi) Termination of obligation due to impossibility of performance. Obligations are terminated because of impossibility to perform it due to the circumstances for which neither of the parties is responsible.

(vii) Death of the debtor or the creditor. Obligations are terminated due to death of the debtor or of the creditor in case the obligation is inseparably linked with the creditor’s or debtor personality.

(viii) Confusion. Obligations are terminated in case the rights of the creditor and of the debtor under the obligation are combined in one person.

(ix) Acts of government. Obligations are terminated on the basis of an act issued by a state authority if this act makes performance of the obligation impossible.

(x) Liquidation. Obligations are terminated with liquidation of a legal entity (a creditor or a debtor) with the exception of cases when the legislation transfers the duties under the obligation of the liquidated legal entity to another person.

2.2.7. Transfer of Contractual Claims and Obligations

A contractual right (a claim) may be transferred to another person by assignment or may pass to another person upon statutory grounds. Consent of the debtor is not required for effective assignment unless the legislation or the contract states otherwise. If a debtor has not been notified in a written form about the effected assignment, the new creditor shall bear the risk of consequences of such omission to notify. In this case performance of the obligation to the previous creditor shall be recognized as performance to the proper creditor. Assignment of rights inseparably linked with creditor''s personality is not permitted. The debtor has the right not to perform the obligation to the new creditor before he or she has been presented with the proofs of effected assignment.

The transfer by the debtor of his debt to other person is possible only with creditor''s consent.

3. RIGHT OF OWNERSHIP AND OTHER REAL RIGHTS

3.1. General Information

The main rules regulating a right of ownership and other real rights are laid down in the Civil Code of the Russian Federation.

According to the Civil Code, a right of ownership includes three aspects: right of possession, right of use and of disposal of a thing. An owner has a right to perform at his or her discretion any actions with respect to the his or her property not contradicting the legislation and not violating rights and interests of other persons, including the rights to deliver his or her property to other persons, to assign the rights of possession, use and disposal over his or her property, to establish a pledge over the property, etc.

Under the Civil Code besides the right of ownership other real rights exist, such as a right of permanent not limited in time possession of a land parcel, which in any case give smaller scope of control over the thing in comparison with the right of ownership.

3.1.1. Movable and Immovable Property

The notion of immovable property includes plots of land, buildings, objects of incomplete construction and other objects, which are closely connected with land and can not be removed without causing a disproportionate damage to their purpose. Aircraft, ships and space objects which are subject to state registration are amounted to immovable property. The law may also refer to immovables certain other property. All things which are not regarded as immovable property are movables.

3.2. Movable Property

The Civil Code establishes the following grounds for acquisition of a right of ownership:

(i) Lawful creation of a new thing;

(ii) Acquisition of fruits, products and income from the use of property;

(iii) Contract aimed at transfer of ownership;

(iv) Succession after a natural person;

(v) Transfer of the property owned by a legal entity to its legal successors in case of reorganization;

(vi) In some cases a person acquires the right of ownership in the thing which does not have an owner, or in the thing which owner is unknown, or in the thing abandoned by its owner or the right of ownership to which is lost;

(vii) Other grounds as determined by the Civil Code.

3.2.1. Acquisition of Ownership in Movables by Delivery

As a general rule, ownership in a movable thing shall pass to the acquirer of a thing under a contract at the moment when delivery of this thing has been made. The delivery is defined as handing the thing over to the acquirer as well as handing the thing over to a shipper (or a post service) for delivery to the acquirer, as the case may be. A thing shall be regarded as handed over to the acquirer from the moment of actual placing the thing into possession of the acquirer or of the person whom he or she has named. If at the moment of conclusion of the contract the thing is already possessed by the acquirer, the thing is regarded as handed over from the moment of conclusion of the contract. Delivery of a bill of lading or of other document of title to the thing amounts to delivery of a thing.

3.3. Immovable Property

Owners of land have the right to sell it, to make a gift of it, to pledge it, to lease it and to dispose it in any other way provided that the land in question has not been withdrawn from commercial turnover or not limited therein. Rights to immovable property, their acquisition, transfer and termination are subject to a state registration in the Unified State Register of Rights. The Unified State Register of Rights contains information about existing and terminated rights over immovable property, details about the immovable property and information about holders of rights. Non-observance of the requirement of state registration of transfer of right to immovable property makes the transfer ineffective.

3.3.1. Right of Limited Use of a Plot of Land Belonging to Another Person (Servitude)

Owner of a land parcel (or of other immovable property) has the right to demand from the owner of a neighboring land and, if necessary, from the owner of other land, to grant him the right of limited use of that land. Servitude may be established in order to provide a passageway to the land in question, to build pipelines, power lines and communication lines, to provide water supply and melioration and for other needs of the owner of that land, if these needs can not be addressed without establishing servitude. Establishment of servitude shall not deprive the owner of the land subject to servitude his or her rights of possession, use and disposal of the land. Servitude shall be established by an agreement between the interested person and the owner of the land subject to servitude. This agreement shall be registered like a right to immovable property. As a general rule, owner of the land encumbered with servitude has the right to a proportionate payment. Servitude survives assignment of rights over the encumbered land to another person.

4. SECURITY RIGHTS

4.1. General provisions

The Civil Code of the Russian Federation determines the following legal opportunities for a creditor to secure his claim:

(i) Pledge;

(ii) Surety;

(iii) Penalty;

(iv) Earnest money;

(v) Retention;

(vi) Bank guarantee.

4.2. Pledge

Establishment of a pledge is a convenient and very widespread way to secure a claim. The essence of a pledge is isolation of a part of property of the debtor (pledger) in order to secure top-priority satisfaction of claims of the creditor (pledgee). Satisfaction of claims of the pledgee is effected by sale of the pledged thing in case in case the secured obligation was not properly executed by the debtor (pledger). Establishment of a pledge may imply either delivery of the pledged thing to the pledge or be made without such delivery. In case the pledgee has possession of the pledged property he or she is obliged to keep it undamaged. Together with the general pledge regime there are some special pledge regimes, namely, pledging things at a pawn shop and pledging commodities in circulation.

4.3. Surety

By a surety agreement a surety undertakes to the creditor of another person to be responsible for performance by this person of the secured obligation in full or in part. In case of non-performance the creditor will be entitled to claim performance from the surety. A surety who has performed the obligation of the initial debtor acquires rights of the creditor against the initial debtor.

4.4. Penalty

Contractual penalty is a sum of money which the debtor is obliged to pay to the creditor in case of non-performance or improper performance of the obligation. The creditor shall not claim the payment of the contractual penalty if the debtor is not responsible for non-performance or improper performance.

4.5. Earnest Money

Earnest money is a sum of money handed over by one party to the other party to certify that the contract has been entered into and to secure the performance thereof. In case the party which gave the earnest money has committed non-performance of the contract, the other party is entitled to retain the sum of the earnest money received. In case the party which received the earnest money has committed non-performance of the contract this party shall pay double amount of the earnest money to the other party.

4.6. Retention

The property which has been delivered by one party to the other party for the purpose of performing the agreement, as the case may be, can be retained by the party who possesses this property until the other party performs its obligations. In case the debtor does not perform his or her obligations the creditor’s claim shall be satisfied from sale of the retained property as from pledged property.

4.7. Bank Guarantee

A bank or other credit institution, or an insurance company (a guarantor), upon a request of a principal, issues a written obligation to pay to a creditor of the principal (a beneficiary), a certain amount of money upon a submission by the beneficiary of a written claim for the payment. This written obligation is called a bank guarantee. Performance of the guarantee shall not depend on non-performance of the principal’s obligations before the beneficiary, which the bank guarantee secures, even if the guarantee refers to these obligations.

5. COMPANY LAW

5.1. General Information

The most widespread types of companies determined by the Civil Code of the Russian Federation are the following:

(i) General partnership is the partnership participants (general partners) of which carry out business activities on behalf of the partnership and are responsible under its obligations with all their property;

(ii) Limited partnership is a partnership which include, in addition to two or more general partners, one or several participants and investors (limited partners) who do not take part in carrying out business of the partnership and are responsible under its obligations within the amount of their investments only;

(iii) Limited liability company is a company established by one or several persons with its registered capital divided into shares; shareholders of a limited liability company are not liable under the obligations of the limited liability company and bear the risk of losses within the cost of their shares (investments);

(iv) Joint stock company is a company which registered capital is divided into a certain number of shares (securities) with a specific nominal value. Shareholders are not liable for the obligations of the joint stock company and bear the risk of losses within the cost of their shares; there are two types of joint stock company: open joint stock company and closed joint stock company.

(v) State and municipal unitary enterprises. Unitary enterprise is a commercial company not having right of ownership in the property which has been delivered to the enterprise by the owner of the property. Only state and municipal enterprises may be established in the form of a unitary enterprise. A unitary enterprise shall be liable for its obligations with the property in its possession. Assets of a unitary enterprise are owned by a state or by municipality; they belong to a unitary enterprise under either the right of economic management or the right of operative management. These are limited proprietary (real) rights.

(vi) Associations and unions of companies. For the purposes of coordination of business, presentation and protection of common interests commercial companies may agree to establish associations and unions which are thus non-commercial organizations. Associations and unions are not liable under obligations of their members. Members incur subsidiary liability under obligations of the association (union).

5.2. Individual Businessmen

Besides establishing a company any natural person can start and carry out business as an individual businessman (entrepreneur). Just like a company, individual businessmen shall be registered in the state register. In all material aspects the business activities of individual businessmen are subject to the same rules as the business activities of legal entities.

5.3. Limited Liability Company

Because of the limitation of the liability of the shareholders, relative simplicity of establishment and of management, creation of a limited liability company is the most popular way of starting business in Russia. It is worth noting, however, that quite often investors choose instead establishing a closed joint stock company.

5.3.1. Legislation

Main legislative acts which provide regulations on limited liability companies and related issues are the following: Civil Code of the Russian Federation, Federal Law “On Limited Liability Companies”, Federal Law “On State Registration of Legal Entities and Individual Businessmen”.

5.3.2. Establishment

The establishment procedure of a limited liability company includes the following main stages:

(i) Execution of the minutes on establishment (or the resolution on establishment in case there is only one shareholder) and of the articles of association;

(ii) Payment for the shares;

(iii) Submission of the application to the registration authorities;

(iv) Receipt of certificates of registration (state registration certificate and tax certificate) and registered articles of association (the date of registration of the company is the date of making record on the company’s establishment in the state register – the Unified State Register of Legal Entities; this date is indicated on the certificates mentioned above);

(v) Application for a letter from statistic authorities with statistic codes of the company and receipt of this letter;

(vi) Manufacturing the company’s stamp (seal);

(vii) Receipt of registration documents from the state non-budget funds.

5.3.3. Shareholders

The maximum number of shareholders of a limited liability company is fifty. Shareholders have the right of pre-emption in case a shareholder intends to sell his share to a third party. Articles of association may prohibit transfer or pledge of a share to a third party. Shareholders may conclude a special agreement in order to determine their rights and duties in the company. Shareholders have the right to leave the company without consent of other shareholders unless the articles of association expressly prohibit this.

5.3.4. Registered Capital and Shares

The articles of association shall determine a size of the registered (charter) capital of the company, which should not be less than the statutory minimum of a charter capital, i.e. 10 000 RUR. At least half of the registered capital as determined by the articles of association shall be paid by the shareholders before the date of the state registration of the company. The payment is to be transferred to the company’s special account opened in one of the banks according to the bank’s procedures. Another half of the charter capital is to be paid within a year after the date of the state registration. Maximum amount of a share can be limited by the articles of association. Contributions to the company''s registered capital can consist of moneys, securities, other things or property rights or any rights which have monetary value.

5.3.5. Transactions with Shares

Transactions aimed at transfer and pledge of shares of limited liability companies shall be performed in notarial form.

5.3.6. Corporate Governance

The management structure of a limited liability company shall include the general meeting of shareholders (the supreme management body entitled to take the most crucial decisions for operations of the company) and the individual executive body, CEO (a natural person: a director, a president, etc.) The articles of association may also provide for the establishment of a supervisory board (which takes some of the powers of the general meeting of shareholders) and of a collegial executive body, a management board (with the CEO at the head). The executive bodies govern the company’s business in accordance the limitations of authority as can be determined by the legislation and by the articles of association.

5.3.7. Liability

Members of the management board, CEO and members of the supervisory board are liable for the damage caused to the company by their wrongdoings.

5.4. Joint Stock Companies

According to the Civil Code of the Russian Federation there are two types of joint stock companies:

(i) Open joint stock company which distinctive features are the following: unlimited number of shareholders; shares may be only publicly traded; permission of other shareholders for sale of share to third parties is not required; minimum registered capital is 100 000 RUR;

(ii) Closed joint stock company with limited number of shareholders (50 or less); shares shall be distributed only within in advance determined circle of persons; minimum registered capital is 10 000 RUR.

5.4.1. Legislation

Main legislative acts regulating the joint stock companies’ issues are Civil Code of the Russian Federation, Federal Law “On Joint Stock Companies”, Federal Law “On State Registration of Legal Entities and Individual Businessmen”, Federal Law “On Stock Market”.

5.4.2. Establishment

The establishment procedure of a joint stock company includes the following main stages:

(i) Execution of the articles of association and other documents on establishment;

(ii) Submission of the application to the registration authorities;

(iii) Receipt of certificates of registration (state registration certificate and tax certificate) and registered articles of association (the date of registration of the company is the date of making record on the company’s establishment in the state register; this date is indicated on the certificates mentioned above);

(iv) Application for a letter from statistic authorities with statistic codes of the company and receipt of this letter;

(v) Manufacturing the company’s stamp (seal);

(vi) Receipt of registration documents from the state non-budget funds;

(vii) Submission of the documents on issue of shares to the registration authority (Federal Service on Financial Markets) for registration;

(viii) Receipt of the documents on issue of shares from the registration authority;

(ix) Payment for the shares.

5.4.3. Main Features

Corporate Governance

The management structure of a joint stock company looks very similar to the management structure of a limited liability company and consists of the following bodies: the general meeting of shareholders, the supervisory board (optional in case the number of shareholders is less than 50), the individual executive body, CEO and the management board (optional).

Payment for the Shares

The full price of the shares distributed among the shareholders by the establishment of the company shall be paid by the shareholders within one year after the date of the state registration of the company. At least half of the price of the shares is to be paid within three months after the date of the state registration. The company cannot start operations until half of the price of the shares is paid.

5.5. Branches and Representative Offices of Foreign Companies

Another possible way for a foreign company to conduct business in Russia is to establish a branch or a representative office which are not legal entities. Foreign companies are liable for the obligations entered into by their branches or representative offices.

6. EMPLOYMENT LAW

6.1. General information

The following central principles of regulation of labor issues in the Russian Federation are laid down in the Constitution of the Russian Federation:

(i) Freedom of labor: Every citizen can freely choose fields of his or her activities and profession;

(ii) Forced labor is prohibited;

(iii) Everyone has the right to work according to the requirements of safety and hygiene;

(iv) Everyone’s labor must be paid without any discrimination;

(v) Everyone has a right to be protected against unemployment;

(vi) Everyone has the right to have rest-time.

The main legislative act regulating labor issues in the Russian Federation is the Labor Code of the Russian Federation.

6.2. Employment Agreement

6.2.1. Conclusion of an Employment Agreement

An employment agreement is an agreement between employer and employee under which the employee undertakes to carry out personally a certain labor function as defined in this agreement and comply with internal labor rules of the organization whereas the employer undertakes to provide employment to the employee in accordance with the determined labor function, to provide working conditions as required by the legislation, collective agreement and local normative acts as well as to pay salary to the employee in due time and in a full amount.

Generally anyone who has reached the age of 16 and has legal capacity may enter into employment agreements. Even a younger person may under certain conditions be an employee in case the work doesn’t damage his health and his ability to get education. An employment agreement must be concluded in writing. Although some exceptions exist, in most cases an employment agreement can determined a trial period for the employee, which shall not exceed three months, in order to confirm that personal qualities of an employee and his skills make him able to perform the work under the employment agreement.

6.2.2. Terms and Conditions of Employment Agreement

There are a number of mandatory provisions which have to be included in any employment agreement:

(i) Place of work;

(ii) Date of commencement of the work;

(iii) Description of the working function of the employee;

(iv) Terms and conditions relating to payments for the work;

(v) Provisions on rest and free time;

(vi) Provisions on mandatory social insurance;

(vii) Description of the working conditions, compensations and benefits for work in heavy, harmful and/or hazardous conditions;

(viii) Other provisions according to the legislation.

An employment agreement can include some additional provisions which shall not have any negative effect upon employee compared with what is provided by the legislation, local normative acts and collective agreements. An employment agreement can be concluded for a not fixed or, in certain cases determined by the Labor Code, for a fixed term of up to 5 years.

6.2.3. Amendments to Employment Agreement

Amendments to employment agreement, including assignment of another type of work, shall be made by agreement of parties, with the exception as provided by the Labor Code.

An employee can be irrespective of his consent assigned another type of work for the period up to a month at the same place in case of a work stop for replacement of another employee or in other extraordinary circumstances.

An employer is obliged to assign an employee another type of work which is not harmful for his health in case the employee demands this due to his or her health conditions (supported by a relevant medical report). In case the employer cannot provide such type of work, or the employee refuses to accept the work offered by the employer, the employment agreement shall be suspended for the period required by the medical report with reservation of the current position of the employee.

6.2.4. Termination

Termination of the employment agreement can be initiated either by the employer or by the employee.

In addition the Labor Code provides the following grounds for termination of an employment agreement:

(i) Consent of the parties which can be reached at any time:

(ii) Expiry of the term of an employment agreement (if despite the expiry the employee proceeds to work with the employer, the agreement is regarded as prolonged for a not fixed period);

(iii) Moving the employee to another organization with his consent or by his request, or his election to a respective position;

(iv) Employee’s refusal to continue working because of change in material terms of the employment agreement;

(v) Employee refusal to transfer to another job because of the health condition as specified in the medical statement;

(vi) Employee refusal to continue to work because of the change of owner of property of the organization, change of the agency affiliation (subordination) of the organization or its reorganization;

(vii) Employee refusal to transfer to another job to another locality along with the employer;

(viii) Violation of the rules of conclusion of an employment contract specified in the Labor Code of the Russian Federation or another Federal Law if this violation rules out the possibility to continue to work;

(ix) Circumstances beyond the will of the parties;

(x) Other grounds.

Termination initiated by the Employee

According to the principle of freedom of labor and to the right of everyone to choose place of work the employee may at any time terminate an employment agreement which was concluded for a not fixed period. In this case an employee has only an obligation to give the employer at least two weeks’ advance notice in writing.

Termination initiated by the Employer

An employer has the right to dismiss an employee only on the grounds determined by the Law. An employer must fulfill a number of acts depending on the concrete ground for dismissal before he or she dismisses the employee.

Under art. 81 of the Labor Code of the Russian Federation the following grounds for dismissal of an employee by initiative of an employer exist:

(i) Liquidation of the company or termination of activities of an employer – individual businessman;

(ii) Reduction of the staff;

(iii) Unsuitability of the employee because of proven lack of professional skills;

(iv) Change of owner of property of the company (only a director, deputy directors and a chief accountant of the company may be dismissed on this ground);

(v) Some grounds related to breach of his or her duties by the employee, such as: (a) repeated breach of the duties by the employee without any valid reasons; (b) a single gross breach of the duties by the employee, namely, absence from work, state of intoxication of the employee at work, unauthorized disclosure of an official secret, violation of rules related to protection of labor, commission of a theft or of a misappropriation, destruction or damaging the property of the employer; (c) commission of an immoral offence (this ground is valid only for employees carrying out pedagogic work); (d) adoption of a decision resulted in damaging the company’s assets (valid only for a director, deputy directors and a chief accountant of a company); (e) a single gross breach of duties (a special ground for dismissal of a director and of deputy directors of a company;

(vi) Loss of trust in the employee working with valuable assets;

(vii) Submitting false documents or false information by the employee;

(viii) Special grounds as included in the employment agreement between the employer and the chief executive officer or a member of the collective executive body of the employer.

In cases (i) and (ii) above the employer is generally obliged to pay the employee a dismissal wage in the amount of an average month salary. Besides, the employee retains his average month salary for the period up to two months when he or she is looking for the new job.

In some cases the employer is obliged to pay the employee a dismissal wage in the amount of average two weeks salary.

6.3. Collective Labour Relationships

6.3.1. Collective Agreements

A collective agreement can be concluded between employees and an employer. The collective agreement provides a general framework for regulation labor relationships in a particular organization. Conclusion of a collective agreement shall be preceded by collective negotiations. If one party announces its intention to start collective negotiations, the other party is obliged to start the negotiations within seven days from the date of receiving the notification.

Terms of the collective agreement which make worse the position of employers in comparison with the legislation are invalid.

6.3.2. Trade Unions

Trade unions activities and related issues are regulated in the Federal Law “On Trade Unions, Their Rights and Guarantees of Their Activities”. A trade union is defined as a voluntary public organization uniting employees with common interests in the same field of occupation for the purpose of protection of their labor and social-economic rights and interests of its members.

7. TAXATION

7.1. General Information

In Russia the main legislative act in this field is the Tax Code of the Russian Federation. The state executive authority dealing with the taxation issues is the Federal Tax Service of the Russian Federation.

According to the Tax Code the system of taxes and duties in Russia includes:

(i) Federal taxes and duties;

(ii) Regional taxes;

(iii) Local taxes.

Only the taxes determined in the Tax Code can be imposed on the territory of the Russian Federation. Regional authorities may determine rates, procedures and terms of payment of regional taxes in accordance with the provisions of the Tax Code of the Russian Federation.

Federal taxes and duties are:

(i) Value added tax;

(ii) Excise taxes;

(iii) Income tax;

(iv) Unified social tax;

(v) Corporate profits tax;

(vi) Mineral extraction tax;

(vii) Water tax;

(viii) Duties for use of animal resources and for use of water biological resources;

(ix) State duty.

Regional taxes are:

(i) Corporate property tax;

(ii) Gambling tax;

(iii) Transport tax.

Local taxes are:

(i) Land tax;

(ii) Personal property tax.

7.2. Individual Taxes

7.2.1. Value Added Tax (VAT)

There are three groups of taxpayers of the VAT:

(i) Organizations;

(ii) Individual businessmen;

(iii) Persons who are obliged to pay the VAT in connection with the import of goods into the Russian Federation.

Eventually the end-consumer pays the total amount of value added tax accrued to the value of the service or the product. If the total revenue of an organization or an individual businessman for the last three consecutive months is not higher than two million RUR (provided that their activity is not connected with the sale of excisable goods or with the import of goods into the customs territory of the Russian Federation) the VAT shall not be paid. The basic rate of the VAT is 18 per cent of the taxable value. With regard to certain kinds of food, medicaments, periodicals and goods for children it is reduced to 10 per cent. The Tax Code contains a list of operations (mainly export-operations) that are subject to taxation at the rate of 0 per cent as well as the list of operations to which the VAT is not applicable. The standard taxation period is a quarter.

7.2.2. Excise Taxes

According to the Tax Code excise taxes are imposed on alcohol, certain alcohol containing products, tobacco products, cars and motorbikes (starting from 150HP), certain oil products and beer. Object of taxation includes import of excisable goods (by organizations, individual businessmen and natural persons) and operations which relate to production and sale of excisable goods (apply to organizations and individual businessmen only). Tax rates are stated in the Tax Code.

7.2.3. Personal Income Tax

The basic personal income tax rate is 13 per cent for residents (tax is imposed on the resident’s income from all sources in and outside Russia) and 30 per cent for non-residents (non-residents are taxed only on the income from Russia). Residents are defined as individuals who spend in Russia not less than 183 days during 12 consecutive months. Dividends received by residents are subject to the personal income tax at the rate of 9 per cent. Insurance payments, cost of prizes for competition-winners which were organized with the purpose of advertising and the interest accrued on bank deposits (exceeding the amount as stated in the Tax Code) are subject to the taxation at the rate of 35 per cent. The personal income tax shall usually be withheld from the taxable payments by the payer.

7.2.4. Corporate Profits Tax

Corporate profits tax is imposed on profits of Russian and foreign organizations which operate in Russia through their permanent office or which receive income from sources on the territory of the Russian Federation. The basis tax rate for Russian organizations is 20 per cent (it may be reduced to 15.5% by regional legislative bodies for certain categories of taxpayers) whereas for foreign organizations it is 20 per cent (10 per cent from use, maintenance or letting on charter ships, aircraft and other transportation vehicles or containers in connection with international transportations). Dividends paid by Russian companies to other Russian companies are subject to 9 per cent tax rate. Dividends paid by Russian companies to foreign companies and by foreign companies to Russian companies are usually subject to 15 per cent tax rate. Tax rate applicable to interest income accrued on state and municipal securities is just 15 per cent (and in some cases it is even 9 per cent or 0 per cent).

7.2.5. Unified Social Tax

Taxpayers of the Unified Social Tax are the following persons:

(i) Organizations, individual businessmen and natural persons who are not individual businessmen;

(ii) Lawyers and notaries who have a private practice.

For (i) above the object of taxation includes salaries, other kinds of remuneration and benefits paid to natural persons under employment agreements and agreements for services. For (ii) above the object of taxation includes income received from commercial operations and from other kinds of professional activity reduced by expenses related to receiving this income. Taxable sums shall be determined and paid for every payee separately. The taxation period is one calendar year. The Tax Code includes a list of payments which are not subject to taxation and a list of taxpayers who are released from paying the unified social tax (mainly the organizations which tender payments to invalid persons if the amount of the payment is not larger than one hundred thousand RUR for one calendar year). Tax rates are regressive (the bigger is the taxable sum the lower is the tax rate). Procedure and terms of the payment of the unified social tax are different for every group of taxpayers.

7.2.6. Mineral Extraction Tax

Mineral extraction tax is imposed on minerals extracted on the territory of the Russian Federation (in some cases also outside of Russia) or extracted from mining waste. The tax rate depends on the type of the mineral (e.g. a rate for coal is 4 per cent of its value; a rate for combustible natural gas is 147 RUR for 1000 m³). For some kinds of minerals the established tax rate is 0 per cent. Rates can be adjusted during the process of excavation. Taxation period is one month.

7.2.7. Water Tax

Taxpayers of the water tax are organizations and natural persons, which use water resources in certain ways:

(i) Taking water from water sources;

(ii) Use of the water area;

(iii) Use of water for the purposes of hydro power engineering;

(iv) Use of water for the purposes of timber-rafting.

Some kinds of water use (mainly those which are not commercially oriented) are not taxable.

7.2.8. Duties for Use of Animal Resources and for Use of Water Biological Resources

Organizations and natural persons which take out licenses to use these resources have to pay these duties. Amount of the duty for use of animal resources is a product of the quantity of animals and the rate of duty for this animal resource. It shall be paid in full as a part of the process of getting a license. Duty for use of water biological resources is to be paid in instalments every month during the period of validity of the license.

7.2.9. State Duty

State duty shall be paid by organizations and by natural persons (Russian and foreign) if they apply to state, regional and local authorities and/or to officials for performing services of legal importance. Some services are provided for free .

7.2.10. Corporate Property Tax

Taxpayers of the corporate property tax are:

(i) Russian organizations;

(ii) Foreign organization which operate in Russia through their permanent offices and/or own immovable property on the territory of the Russian Federation, or on its continental shelf or in the exclusive economic zone of the Russian Federation.

For Russian and foreign organizations the tax is imposed upon movable and immovable property reflected in their balance sheets as fixed assets. In case a foreign organization does not operate in the Russian Federation through its permanent office then only the immovable property located on the Russian territory and owned by this organization is subject to taxation. Plots of land, water objects and other natural resources are free from taxation as well as some other objects indicated in the Tax Code are. Tax rates are established by regional authorities and can not be higher than 2.2 per cent. Differentiated approach to tax rates is allowed. Taxation period is one calendar year.

7.2.11. Transport Tax

Transport tax is a regional tax imposed mainly upon the owners (in some cases upon the users) of all kinds of vehicles (with certain exceptions). The exact amount of tax depends mainly on the power of the engine. Tax rates are established by regional authorities subject to the provisions of the Tax Code.

7.2.12. Gambling Tax

Gambling tax is applied to:

(i) Gambling tables (from 25 000 RUR to 125 000 RUR for every gambling table);

(ii) Slot machines (from 1 500 RUR to 7 500 RUR for every slot machine);

(iii) Totalizator box-offices and bookmaker box-offices (from 25 000 RUR to 125 000 RUR for every box-office).

Every object mentioned above shall be registered with the tax authority not later than two days before the date of its installation. Concrete rates are to be established by regional authorities; if no concrete rates have been established then the minimal rates shall apply. Taxation period is one calendar month.

7.2.13. Land Tax

Land tax is a tax based on the cadastre value of land. The taxpayer is the owner of land or, in some cases, the user of land. Tax rate is different for different types of land property. Taxation period is one calendar year. Land tax shall be paid, in two equal installments, not later than on September 15 and November 15.

7.2.14. Personal Property Tax

In Russia the personal property tax is imposed on houses, garages, flats, other buildings, premises and structures owned by natural persons. Tax rates are progressive (the higher is the property value, the higher is the tax rate, from 0.1% to 2%) and are established by regional authorities within the limits set by the Tax Code. Taxation period is one calendar year. Personal property tax shall be paid, in two equal installments, not later than on September 15 and November 15.

8. INTELLECTUAL PROPERTY

8.1. General

Issues of intellectual property are governed in the Russian Federation by the fourth part of the Civil Code.

The Civil Code defines intellectual property as the results of intellectual activity and as the equated to them means of individualization of legal entities, of goods, services, works and of business enterprises. The intellectual property includes, the following:

1) works of art, science and literature;

2) computer programs;

3) databases;

4) performances;

5) phonograms;

6) broadcastings;

7) inventions;

8) useful models;

9) industrial models;

10) selection achievements;

11) topologies of integral chips;

12) secrets of production (know-how);

13) firm names;

14) trademarks and service marks;

15) names of places of origin of goods;

16) commercial designations.

Intellectual property is protected by law.

8.2. Intellectual Rights

The Civil Code makes a distinction between, on the one hand, intellectual property and, on the other hand, intellectual rights. Intellectual property is subject matter of intellectual right, which include the exclusive proprietary right, and personal non-proprietary rights (such as right of access and other rights).

Intellectual rights are independent from the right of ownership to a material medium, in which the intellectual property is contained.

An author of a result of intellectual activities is a natural person, with whose creative labor this result has been made. The author enjoys the right to be regarded as an author and in cases, as stipulated by the legislation, the right to a name and other personal non-proprietary rights.

The right to be regarded as an author, the right to a name and other personal non-proprietary rights may not be transferred or assigned. Waiver from these rights shall be void. The right to be regarded as an author and the right to a name have a not limited in time protection. Such protection after the death of the author can be exercised by any interested person (with the exception of some cases as stipulated by the legislation).

8.3. Exclusive Right

The exclusive right to a result of intellectual activity initially belongs to the author. This right can be assigned to another person under an agreement and can pass to another persons on other grounds as determined by the legislation.

The person who has the exclusive right to a result of intellectual activity or to means of individualization (a right holder) is entitled to use the result or the means at his or her own discretion in any way not contradicting the legislation. A right holder may generally dispose of a result of intellectual activities or of means of individualization.

The right holder may at his or her own discretion allow or forbid other persons to use the result of intellectual activities or the means of individualization. Non-prohibition shall not be regarded as a permission. In certain cases as determined by the legislation the exclusive right is protected under condition of state registration of the relevant result of intellectual activity or of the relevant means of individualization.

In cases when the result of intellectual activities or the means of individualization is subject to state registration, transfer of the exclusive right to such result of intellectual activities, pledge of this right or granting a right to use the result or the means are also subject to state registration.

8.4. Disposition of Exclusive Right

The Civil Code makes a distinction between, on the one hand, an agreement aimed at alienation of exclusive right and, on the other hand, a license agreement. Under an agreement on alienation of the exclusive right one party (a right holder) transfers or is obliged to transfer to another party (an acquirer) the exclusive right in a full scope.

Under a license agreement a right holder (a licensor) grants or is obliged to grant to another party (a licensee) the right to use the intellectual property within the limits as determined by the agreement.

Russian law distinguishes between two types of license agreements: a not-exclusive license (the licensor retains the right to grant licenses to other persons) and an exclusive license (the licensor does not retain the right to grant licenses to other persons).

The licensee may grant the right to use the intellectual property to another person with a written consent of the licensor (a sublicense agreement).

8.5. Protection of Intellectual Rights

The means of protection (the remedies) of exclusive rights to intellectual property include, in particular, the following claims:

1) For recognition of the right, to be brought against the person who denies or does not otherwise recognize the right;

2) For stoppage of activities which violate the exclusive right or create a threat of violation of the right, to be brought against the person who committed such acts or prepared for such acts;

3) For compensation of damages, to be brought against the person who unlawfully used the intellectual property without consent of the right holder or otherwise violated the exclusive right;

4) For restitution of the material medium, to be brought against the manufacturer, importer, depositor, carrier, seller or other distributor, or against a bad faith acquirer;

5) For publication of the court’s decision about the violation committed with indication of the actual right holder, to be brought against the person who violated the exclusive right.

If a legal entity repeatedly or grossly violates the exclusive rights, a court may take a decision on liquidation of such legal entity following the request from the public prosecutor. If such violations are committed by a natural person, who is at the same time an individual businessman, his or her status as an individual businessman may be terminated by the court.

For the purposes of informing about the exclusive right a right holder of a copyright can use the copyright protection symbol which include the following elements: the Latin letter "C" in a circle; the name of the right holder; the year of the first publication of the work.

In addition, sections 146 and 147 of the Criminal Code of the Russian Federation establish criminal responsibility for plagiarism, illegal use of objects of copyright and for violation of patent rights in case these violations caused gross damages to the right holder.

8.6. Patent Law

Patent rights are rights to an invention, to a useful model or an industrial model. On the other hand, computer programs are subject matter of copyright.

The right holder of patent rights enjoys

1) The exclusive right, and

2) The right to be regarded as an author.

In certain cases as determined by the legislation the author of an invention, of a useful model or an industrial model has other rights such as the right to obtain the patent, the right for a reward for an employee’s invention, employee’s useful model or industrial model.

Only those inventions and useful models (in the scientific or technical sphere) which meet the statutory requirements can be protected by patents. The same applies to the industrial models in the field of a