General review of Russian foreign direct investment regulation

Published on March 12, 2018

For many foreign investors the Russian market may resemble a book written in an unknown language. It is clear that you can open and read it and thus learn a lot of new and useful things from it, but without knowledge of the language, which it is written in, it’s just an abstract object, as all of its advantages remain inaccessible to us. With this article about the general regulations of foreign direct investment in Russia, we hope to change the situation and help you to start understanding this book.

The concept of the foreign investor, foreign investment and foreign direct investment

Basic concepts related to investment activities are set forth in article 2 of the Federal law of 09.07.1999 “On foreign investments in the Russian Federation” No. 160-FZ. In particular, foreign legal entities, foreign organizations (do not belong to legal entities, but are also legally established in the territory of a foreign state), a foreign citizen, a stateless person permanently residing outside the Russian Federation, international organizations and foreign states may act as a foreign investor.

At the same time, there are two main requirements: have a connection to a foreign state (either in the form of citizenship or in the form of incorporation), as well as the legitimacy of conducting investment activities in the territory of the Russian Federation under the legislation of the foreign state.

Furthermore, as noted earlier, Russian legislation provides not only for the concept of foreign investment, but also the concept of foreign direct investment (hereinafter referred to as FDI). While the former refers to any investment of foreign capital in a project of entrepreneurial activity on the territory of the Russian Federation (including in the form of investment of money, securities, other property, certain property rights, etc.), the FDI refers only to: a) the acquisition by a foreign investor of no less than 10 percent of the shares in the charter capital of a commercial organization in the territory of the Russian Federation, b) capital investment in fixed assets of a branch of a foreign legal entity in the territory of the Russian Federation or c) financial lease of equipment, the list of which is determined separately and the customs value of which must be at least 1 million rubles, by a foreign investor in the territory of the Russian Federation.

Thus, the list of FDI-related activities is rather short, but the definition of FDI itself is separately enshrined in legislation.

Commercial organizations with foreign investments

According to article 50 of the Civil code of the Russian Federation commercial organizations are the organizations pursuing profit as the main purpose of their activity and can be found in the following legal forms:

– companies (joint-stock company or limited liability company);

– partnership (general partnership or special form of limited partnership).

At the same time, it would be important to bear in mind that there is no separate procedure for the establishment of joint venture or wholly foreign-owned enterprise in the Russian Federation. The registration is carried out in the common manner established in the Law of 08.08.2001 “On state registration of legal entities and individual entrepreneurs” № 129-FZ.

In addition, foreign investors are also entitled to acquire a share in the charter capital of a previously established commercial organization.

However, it is important to note that Russian legislation has a concept of the commercial organizations having strategic importance for economy, safety, defense of the country and other strategic directions (strategic branches of economy). One of these branches is the fuel and energy sector, which nowadays accounts for a lion’s share of foreign investment in Russia. Generally, the participation of foreign investors in so-called strategic commercial organizations is limited and there are special procedures for obtaining permission to invest in these sectors of the economy.

Branches of foreign legal entities

When a foreign investor plans to open a branch in the territory of the Russian Federation, they also have the right to choose its form, by virtue of article 55 of the Civil code of the Russian Federation there are two forms of separate subdivisions of legal entities located outside it’s parent organization’s location of origin : the branch itself and the representative office.

The main difference between these two forms is that if a branch office has the right to perform all or part of the functions of the parent organization, the representative office can only represent and protect the interests of the parent organization. Thus, the functions of the first form are much broader than those of the second form.

Nevertheless, to establish both legal entities, it is necessary to obtain state accreditation via the relevant state bodies, which is generally the Federal Tax Service.

Financial lease of equipment

According to article 665 of the Civil code of the Russian Federation under this agreement one person (lessor) undertakes to acquire property and to provide to another person (lessee) this property for a fee for temporary possession and use. The right to choose the property itself and the seller generally belongs to the lessee, although the contract may provide otherwise.

The principles of investment activity in Russia

Finally, the main principles of FDI in Russia include the following:

– national regulation of foreign investments at the federal level;

– equal protection of the rights of foreign and Russian investors;

– adoption of international treaties on the legal regulation of foreign investments by Russian legislation.