Registering an Office in Yekaterinburg

November 2003

Summary: The following report provides practical information for foreign companies planning to establish an office in the Sverdlovsk region. This report provides an outline of registration procedures and a general review of the services available in the local market.

General survey: Yekaterinburg is Russia's fourth largest city with a population of 1.303 million. It is the capital of the Sverdlovsk region and also serves as the center of the Urals Federal District. Yekaterinburg has traditionally been a center for heavy industry as well as a freight transportation hub.

Yekaterinburg is well known for its concentration of industrial manufacturing plants. The city's largest factories produce oil extraction equipment, tubes and pipes, steel rollers, steam turbines and manufacturing equipment for other factories.

Sverdlovsk region leads the Urals region in attracting foreign investment with $630 million as of March 2003. Over the past several years the U.S. has been the Sverdlovsk region's leading trade partner, with trade turnover that amounted to $800 million in year 2002.

Any company that plans to operate in Russia for more than 30 days a year must be registered in accordance with the law on 'Foreign Investment in the Russian Federation', adopted in 1999.

1. Types of Offices

A foreign business can operate in the Sverdlovsk region in any of three ways:

A. As a joint venture with a local company or as a legal entity that is 100% foreign owned, which is the easiest variant of registration. In this case , the foreign businessmen obtain the ability to operate in the Russian Federation on an equal footing with resident enterprises, because, in essence, they become a Russian legal entity. Moreover this way of registration is less expensive and less time-consuming.

B. In cases where foreign legal entities wish to participate personally in inter-relations with Russian counterparts they should register

a branch office; or
an accredited office that is wholly foreign-owned.
The difference between these two is in the scope of authorities conceded.
A branch office is given wider authority. The parent company itself specifies the scope of authorities in a warranty of authority given to the branch director.
Accredited offices fulfill representation functions and are not allowed to practice commercial activity.

C. Another way, which is often the easiest for the initial stage of entering the local market, is to find a Russian partner company to act as a distributor/dealer. Through such an agreement, a U.S. company can avoid registration issues altogether, but will have limited influence on marketing policy and percent markup by the Russian dealer/ distributor.

Taxation requirements vary according to the type of office established.

2. Registration Process

Investors who choose to open a legal entity with foreign investment (with or without a local partner) may be registered either as a limited liability company or as a joint stock company (opened or closed).

Limited liability company (LLC) – is the most frequently used type of office registration as it is the least expensive and time consuming. The disadvantage of this type is the complicated procedure governing further sale of partnership shares. The number of LLC members is limited to 50.

According to Russian law the minimum charter capital required for a limited liability company is 10,000 rubles (about $ 330). The registration process for an LLC takes about two weeks, and the registration fee is about $ 70.

Both branch and representation offices need accreditation. A branch office is usually established when a foreign company already headquartered in Russia begins operations in another Russian city. A branch office cannot make a profit under this type of registration. Unlike in the U.S., a branch office in Russia is not considered to be an independent legal entity. Unlike a legal entity with foreign investment, a branch or representative office must be accredited in Moscow in the State Registration Chamber. The accreditation term for a branch is up to five years, subject to renewal. The registration fee is $ 1,000 for one year; $ 2,000 for two years; $ 2,500 for three years and $ 3,500 for five years of operation. The registration process takes about 1-1.5 months.

Both branch offices and LLCs are subject to all applicable Russian taxes and regulations.
Like branch offices, accredited offices cannot make a profit and cannot operate independently in Russia. Accredited offices are established when the company enters the local market and promotes its products or services without engaging in profit-generating activity.
An accredited office may register and open its regional branches only with permission from the State Registration Chamber in Moscow. To receive permission to open a regional branch, the location should be discussed with local authorities.
An accredited office may register for a period of one to three years. The registration fee is $ 1,000 for 1 year, $ 2,000 for two years and 2,500 for 3 years. Accredited offices may file tax payments annually, rather than quarterly, which saves the company time and money.

A new office must also register with the region statistical bureau, the pension fund and tax inspection authorities within ten days of the date the State Registration or Accreditation Certificate was issued. A joint venture or a branch office must register with the tax inspection of the district where the company plans to rent an office. There is no fee for registration with tax authorities.

3. Documents Necessary for Registration

The list of documents that must be submitted to obtain registration is almost the same for joint ventures, branch offices and accredited offices. All documents must be translated into Russian, sealed, and notarized. To obtain a seal or stamp on documents notarized in the U.S., companies should apply to the secretary of state of the state where the document was issued.

The following documents are required:

· an application form signed by the head of the company (the application form is available from the registration chamber)
· the company's charter (the original and a notarized copy). For joint stock companies established by more than two partners, an agreement on establishing a joint stock company should be produced (the original and a notarized copy). For branch registration, the charter should include a list of subsidiaries and accredited offices.
· a notarized copy of the company's executive board decision to establish a joint venture, branch office or accredited office
· for joint ventures, a protocol or statement of intent, certifying the plans to establish a company
· a letter from the company's U.S. bank certifying solvency, or, in some cases, an individual's solvency;
· an abstract from the relevant U.S. state register certifying the company's origins and a document verifying the legal status of the company (translated into Russian and notarized) this abstract is valid for registration for a year from the issuing date. The U.S. director of the firm must submit a copy of his or her passport.
· a letter of guarantee certifying purchase of property or a lease agreement verifying the local address of the registering company

The following additional documents should be attached when registering an accredited office:

· a letter from parent company certifying that the head of the new office is authorized to act in that capacity;
· not less than two letters from Russian business partners attesting to the stability of the U.S. company and providing a description of the proposed activity.

Joint-stock companies must register shares issue in the regional branch of the Russian Federal Commission for Stock Market after the initial registration procedure is finished.

According to the Tax Ministry there are about 20 thousand foreign enterprises registered in Russia, 70% of which are located in Moscow.

According to July 2003 order of the Tax Minister of RF , all permanent representative offices and branches of foreign companies must get new Taxpayer Identification Numbers (INN). The new federal directory "Foreign Enterprises Codes" will contain the information of all foreign representations and branches registered in Russia.

The assignment of the new INNs started on October 1, 2003. The old INNs will expire starting January 1, 2005. The list of the documents necessary for registration in the tax departments remains the same.

4. Certification

It is impossible to clear goods through customs until a company's registration is completed.
In addition, about 40 types of businesses, including construction, food processing and pharmaceuticals industries, are currently subject to additional licensing. The licensing fee depends on the type of activity. The licensing process usually takes about a month. Licenses are granted for three years and may be suspended or revoked in the event the company does not abide by federal regulations.

Goods entering Russia are certified according to Russian standards, known as GOST-R. Some goods also require a sanitary certificate, which can be obtained only when the goods have already been imported into Russia.

5. Banking

Firms (both resident and non-resident) planning to operate in Russia can open both ruble and dollar bank accounts. Financial transactions can be conducted in local and foreign currencies. The bank fee for opening an account is about $35.

There are no foreign banks operating in Yekaterinburg. US companies planning to open an account in Yekaterinburg may choose a bank among affiliates of Moscow-based (Alfa bank, Guta Bank, MDM, Vneshtorgbank and etc) and regional banks (UralVneshtorgBank, UralTransBank, Severnaya Kazna, UralpromstroyBank etc).

A number of ATMs are available around the city, in the banks, large stores and office buildings. VISA, MasterCard, and Western Union are widely used.

The following documents are required to open a bank account:

- Application form;
- Certificate of registration (notary copy);
- Articles of incorporation (notary copy);
- Authorized signature and stamp;
- References from tax inspection, social insurance fund, regional statistic committee;
- Protocols and orders for authorized personnel appointment.

The district tax inspection must be informed immediately following the opening of the bank accounts. Any delay in providing tax authorities with information on the status of bank accounts can result in penalties.

The law does not limit the number or type of bank accounts that a company can open.

6. Office Space

Businesses may choose either to rent office space from another establishment (sublease), to rent an office in a business center, or to purchase office space.

Several local hotels also provide office space on their premises. It is difficult to find offices ready for occupancy in Yekaterinburg that meet Western requirements. Older buildings usually require significant renovation and the style of offices in new buildings can vary greatly from U.S. standards.

Purchasing an office is a less expensive option in the long run. Firms that are interested in purchasing office space are advised to contact the city property committee, which can provide current information on city properties available either for production and storage or for office space and trade.

Several new modern business centers with developed infrastructure including IDSN lines, air conditioning, ventilation, security and alarm systems, etc are available or under construction. These new office facilities are located in the downtown and provide wide range of additional services: garages and parking lots, conference and hotel rooms, cafeterias, shops and other public services. Naturally these services are expensive and are aimed at the so called "business elite" companies. The most well-known is the World Trade Center (WTC), which is a member of the WTC Association and collocated with the Atrium Palace Hotel close to the city center.

However there is great demand for cheaper offices from small and medium enterprises (SMEs). Demand by SMEs for office space exceeds the market offering by seven times. According to the estimation of the Urals Real Estate Chamber, the shortfall in office space was over 20,000 square meter in the year 2002, with the highest demand at the two ends of the market: the cheap ($ 500 per square meter annually) and the most expensive (over $1,000 per square meter per annum).

Many small companies prefer to rent offices in former institutional or educational buildings or to purchase and re-build apartments on the ground floors of buildings. The rental price for this kind of office space is about $ 20 per square meter per annum. These facilities often require considerable additional investment to bring the offices up to Western standards.
Only about 30 % of the companies buy commercial real estate while most rent office space.

A foreign company registered in the region can buy and sell real estate according to the Civil Code of Russian Federation with no exceptions. The contract must be signed personally and registered in the state registration chamber.

There is no difference between the Russian and foreign companies when renting office space.

7. Communication

There is a choice of two main telephone providers: "Ural" and "Ural Telephone Company".
The cost of telephone installation may vary from $ 500-1,000. Firms will typically be billed separately for the basic monthly fee and for long distance and international calls.
Etel, Equant and Teleross are the leading providers of alternative services such as ISDN lines.

Cellular communication is the most rapidly growing sector on the IT market. Three standards of equipment are now in use in Yekaterinburg: NMT-450, CSM-900/1800 and D-AMPS. The leading companies in Yekaterinburg are Motive (www.ycc.ru) , Megafon (www.megafonural.ru), and UralTel (www.uraltel.ru) with a total of 500,000 subscribers between them. All these companies provide coverage in Sverdlovsk and neighboring regions as well automatic roaming within Russia and abroad. Minimum cost for users varies from 3 to 50 cents per minute and depends on the chosen tariff plan. Costs vary widely, depending on the company and on the type of service provided.

Computers, printers, copy machines and other IT equipment are offered by a large number of local companies such as Kloss Services, ASM Electronics, Quorus ISP, Urals Computer House and others.

8. Hiring Personnel

There are several agencies specializing in hiring qualified personnel - Ancor Yekaterinburg, Staff Pro, Carrier Union and the others. They provide a wide range of services including personnel search, outsourcing, consulting services and assessment centers.

Average Monthly Salaries
for qualified English speaking professionals

Regional representative $ 600- $2000
Sales manager $ 500- $1200
Accountant $ 300- $400
Chief Accountant $ 600- $1200
Engineer $ 300- $800
Sales Representative $ 300- $600
Office manager $ 250- $450

9. Work Permits

Companies must obtain work permits for all foreign personnel (including the company's Director). The federal migration service issues the first permission for the company that employs foreigners and the second directly to the employee.

The process of obtaining a work permit normally takes one month. Local lawyers can prepare all the necessary documents and send them for signature.

10. Legal Services

It is highly recommended to contract with a local lawyer or law firm that specializes on registration issues to conduct and facilitate the registration process and for further legal routine maintenance such as renting office space, contract monitoring.

Average Prices for legal services
Registration of the Limited Liability Company $ 300
Registration of the closed/open joint stock company
(including the issue of shares) $ 600
Accreditation of a branch/representation office $ 1,000
Work Permits $ 500

11. Educational Services

Quality School International (QSI), a non-profit institution operating 25 international schools in Central Europe and Asia, Far East and Middle East, opened an international school in Yekaterinburg in August 2003. QSI Yekaterinburg offers an international curriculum in the English language for elementary students five years through thirteen years of age.

The primary purpose of the school is to meet the needs of the children of foreign expatriates living in Yekaterinburg who require this type of education with a view to continuing their education in their home countries with a minimum of adjustment problems. In addition to its scholastic goals, the school endeavors to provide its students with knowledge of Russian language and culture. (www.qsi.org, e-mail: Yekaterinburg@qsi.org)

12. Contact list

Sverdlovsk Regional Administration

Eduard Rossel
Governor of Sverdlovsk region
1, Oktyabrskaya square, 620031, Yekaterinburg
Tel: 7 (3432) 51-13-65
http://www.midural.ru

Yuriy Osintsev
Minister, Ministry of International and Foreign Economic Relations, Sverdlovsk region
1, Oktyabrskaya square
620031, Yekaterinburg
Tel: 7 (3432) 55-42-91, 58-96-56
Fax: 7 (3432) 51-98-70

Vladimir Lomovtsev
Head, Investment Department Economic and Labor
Ministry, Sverdlovsk region
21 Gorkogo street,
620031, Yekaterinburg
Tel: 7 (3432) 77-16-72; 77-16-73
Tel: 7 (3432) 77-16-70

Sergey Dobrovol'skiy
Head, Sverdlovsk Regional State Tax Inspection
11, street Pushkina
620151, Yekaterinburg
Tel: 7 (3432) 71-83-42

Gennadiy N. Drozdetskiy
Head, Sverdlovsk Regional Customs House
25, Gogol street
Yekaterinburg
Russia
Tel: 7 (3432) 50-33-77
E-mail: smith@ural.customs.ru
http://www.ural.customs.ru

Yekaterinburg City Government

Official city site: http://www.ekburg.ru

Arkadiy Chernetskiy
Mayor of Yekaterinburg
24, street Lenina
620014, Yekaterinburg
Tel: 7 (3432) 56-29-90, 77-55-01

Svetlana Garipova
Head, International and Foreign Economic Relations
Department, City of Yekaterinburg
24, street Lenina
620014, Yekaterinburg
Tel: 7 (3432) 71-13-07
Fax: 7 (3432) 71-43-83

Alexey Kardapoltsev
Head, Customs House, City of Yekaterinburg
50, street Melnikova
Yekaterinburg
Tel: 7 (3432) 71-97-79

Stanislav Khar'kov
Head, State Tax inspection, City of Yekaterinburg
41a, pereulok Parkoviy
620137, Yekaterinburg
Tel: 7 (3432) 49-53-04

City Property Committee
24, Lenin street, office 502
620014, Yekaterinburg
Tel: 7 (3432) 77-57-27

The legal information in this report was prepared with the assistance and advice of Igor Bassargin, INCOR ALLIANCE INC, attorney at law. Yekaterinburg,
56, Pervomaiskaya street, 7 floor
Phone # 7 (3432) 505-845
e-mail: ies-law@mail.ru