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Russian Entity Formation: Wholly Foreign Owned Entity (WFOE)

One of the most common requests my law firm gets regarding Russia comes from a non-Russian company seeking assistance in setting up a Russian joint venture or a representative office. When we tell them that only rarely does it make sense to go into Russia with a joint venture or a representative office, they commonly respond either with surprise that there are other alternatives or by telling us how this is how their very well run competitor had entered the Russian market. When we explain that Russia now allows Wholly Foreign Owned Entities (WFOE), they quickly realize the benefits of not getting enmeshed with a Russian joint venture partner. The benefits of a WFOE over a Representative Office are more difficult to explain.

The purpose of this article and its accompanying chart is to briefly compare the advantages and disadvantages of establishing a business in Russia as a representative office or as a limited liability company (OOO) wholly-owned by a foreign entity. At the outset, however, it must be made clear that if your intention is to buy or sell goods in Russia, you cannot legally go in as a representative office. A representative office is limited to representing or marketing for a foreign owned entity. It is not allowed to conduct real business within Russia. In the past, many foreign companies would go into Russia as a representative office and then conduct business within Russia, but only because they had no other real choice. Companies have that choice now.

Comparison Representative office Limited Liability Company (OOO)
Legal Status Not an independent legal entity. All property would be owned by the foreign (non-Russian) entity.

Not allowed to conduct commercial activity so it doesn�t technically generate profits. Limited to negotiating contracts, marketing or conducting other supporting activities for the foreign entity.
Can act only through a manager authorized to act for and on behalf of the foreign entity pursuant to power of attorney. All the rights of a Russian company. Managing Director elected by the foreign company can act on behalf of OOO without a power of attorney within the framework provided by Russian legislation, OOO corporate documents and agreements concluded between OOO and the director.

Liability Foreign entity would be liable for acts of its representative office done pursuant to the power of attorney. OOO is liable for its own obligations. The foreign entity�s liability generally limited to its contribution to Charter Capital.
Charter Capital None Approximately $330 minimum charter capital required.
Fees and costs $10,000 -$18,000 $3,500 -$6,500
Foreign employee issue Foreign employees must obtain personal work permit. In order to employ foreign employees, a company must obtain an employment permit. Afterwards, every foreign employee must obtain a personal work permit.
Taxation Subject to payroll, retirement, road, and social security taxes. Subject to same taxes at same rates as representative office, but also subject to income tax, VAT (e.g. equipment shipped for sale to Russia is subject to VAT); property taxes, and transportation taxes (if OOO owns vehicles. The foreign entity dividends received from OOO may be subject to either U.S. or Russian taxation according to the Treaty signed between USA and Russia regarding double taxation.

In deciding whether to establish a representative office or a WFOE, the investor must balance the convenience of a representative office with the ability to conduct business in Russia through a WFOE. A representative office in Russia can be opened and closed with relatively little formality. Since the office is not a Russian legal person, it is not subject to many of the burdensome regulations that apply to legally established Russian companies. Since a representative office cannot conduct business within Russia, the office is not subject to burdensome tax and reporting requirements. However, the business activities of a representative office are severely restricted to the point that it usually can do little more than act as a company�s marketing arm in Russia. On the other hand, a WFOE entity in Russia is considered to be a legal person, and as such, it enjoys the both the rights and obligations of any other Russian company. Thus the scope of business operations for a WFOE in Russia is nearly always equivalent to that of any other Russian company. But a WFOE in Russia is also subject to the same taxation, reporting and company regulation requirements of any Russian company. The burden of these obligations for a WFOE must be balanced against the freedom to conduct real business in Russia in each individual instance where a company wishes to conduct business in Russia.

Dan Harris is the founding member of Harris & Moure, http://www.harrismoure.com, an international law firm for businesses in or involved with Asia, Eastern Europe, and North America. Harris & Moure attorneys have been handling Russian legal matters for more than fifteen years and they have a licensed Russian lawyer on staff.

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