Investments in Russia

Transcription

1 Investments in Russia Edition

2 BEITEN BURKHARDT Rechtsanwälte (German Attorneys-at-law), Investments in Russia

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4 Contents Preface 1 1. Special Framework Conditions for Foreign Investors Legislative Basics Content of the Law on Foreign Investments Basic Provisions Priority Investment Projects Restriction of Foreign Investors Activities Banking Sector Insurance Services Sector Investments in Businesses which are Strategically Important 7 2. Corporate Law Forms of Commercial Activities in Russia Representative Offices Status of a Representative Office under Russian Law Opening (Accreditation) of a Representative Office Activities of a Representative Office Branches Status of a Branch under Russian Legislation Accreditation of a Branch Russian Legal Entities Organizational and Legal Forms of Commercial Legal Entities in Russia Registration of Legal Entities Limited Liability Companies Legal Status Foundation Procedure Charter Capital. Alienation of Shares Agreements on Exercising Rights of Company Participants Participant Withdrawal or Expulsion Management Bodies Liability of the Company and Its Participants Joint Stock Companies Legal Status Establishment of Joint Stock Companies Shareholders Register and the Registration of Share Issuances Management Bodies Executive Bodies of a Company Liability in a Company 29 I

5 3. Bases of Legislation on Real Estate General Characteristics of the Existing System for Legal Regulation in the Field of Real Estate State Registration of Real Estate and Registration of Rights Thereto State Registration of Land Plots State Registration of Other Real Estate State Registration of Rights to Real Estate Acquiring Rights to Land Plots Types of Rights Acquiring Rights Restrictions on the Rights of Foreigners Status of a Land Plot Acquiring Rights to Buildings and Structures Acquiring an Existing Building (Structure) Acquiring an Unfinished Building (Structure) Constructing a Building (Structure) Real Estate Pledge Concession Agreements Participation in Share Participation Construction Labor Law Employment Agreement Term of an Employment Agreement Probation Period Compensation Working Hours Leave Statutory Holidays Secondary Employment. Prohibited Competition Trade Secrets Termination of Employment Agreements Specific Features of the Employment of Company Executives Financial Liability Employee s Financial Liability Employer s Financial Liability Employment of Foreign Citizens Employer s Obligations Permitting Documents Migration Registration Taxation Introduction Main Innovations of the Tax Code of the Russian Federation General Trend to Reduce Tax Rates 54 II

6 5.2.2 Cancellation of Tax Concessions for Particular Enterprises and Stimulation of Development of Certain Types of Activities Tax Control Tax Violations and Penalties Existing Drawbacks of the Russian Tax System General Overview of the Russian Tax System Tax and Levies Legislation Principles of Taxation The System of Taxes and Levies in the Russian Federation Corporate Profits Tax Object of Taxation Tax Rates Procedure for Calculating Taxable Profit Income Expenses Special Rules Features of Taxation of Foreign Companies Controllable Transactions and Transfer Prices Value Added Tax (VAT) Object of Taxation Determining the Tax Base Important VAT Concessions Tax Rates Procedure for Calculating, Deducting, and Paying VAT. Output and Input VAT Controllable Transactions and Transfer Prices Excise Taxes Taxed Goods Excise Rates Procedure and Terms for Payment of Excise Taxes Controllable Transactions and Transfer Prices Transportation Tax Corporate Property Tax Object of Taxation Tax Base Tax Rate Concessions on Property Tax Payment Procedure and Terms Customs Duty Assessment Base Customs Duty Rates Concessions for Investors Payment Procedure and Terms Social Payments General Description of the Social Payments System 80 III

7 Changes in the Social Payments System New Procedure for Paying Insurance Contributions (introduced on January 1, 2010) Contributions for Insurance Against Industrial Accidents and Occupational Diseases Individual Income Tax Object of Taxation Tax Rate Tax Collection Procedure Foreign Citizens Obligation to Pay the Tax Summary of Russian Taxes State Controlling Authorities Authorities that Carry Out State Registrations or Accreditations of Legal Entities, Their Representative Offices and Branches Currency Regulation Authorities, Currency Control Authorities and Agents Russian Federation Antimonopoly Authorities and Antimonopoly Regulation Antimonopoly Legislation of the Russian Federation Antimonopoly Authorities of the Russian Federation Main Provisions of Antimonopoly Legislation of the Russian Federation Regulatory Acts and Actions of Authorities and Local Authorities Aimed at Restricting Competition Agreements (Concerted Actions) of Authorities and Local Authorities, State Non-Budget Funds and the Central Bank of the Russian Federation Restricting Competition Unfair Competition State Authorities Control over the Observance of Antimonopoly Legislation and Economic Concentration Appealing Decisions and Instructions of the Antimonopoly Authorities. Liability for Violating Antimonopoly Legislation The Federal Service for Financial Markets Financial and Tax Authorities, Other Controlling Authorities Tax Authorities of the Russian Federation Ministry of Internal Affairs of the Russian Federation Federal Service for Financial Monitoring (Rosfinmonitoring) Federal Service for Financial and Budgetary Supervision Customs Authorities Governmental Commission for Control over Foreign Investments in the Russian Federation Court System. Arbitration Courts General Information on the Court System of the Russian Federation 112 IV

8 7.1.1 Concept of the Court System of the Russian Federation Russian Federation Legislation on the Court System Structure of the Court System of the Russian Federation Arbitration Courts in the Russian Federation Competence of Arbitration Courts Consideration of Cases in Arbitration Courts (Arbitrages) General Jurisdiction Courts of the Russian Federation Competence of General Jurisdiction Courts Consideration of Cases in General Jurisdiction Courts Non-State Arbitration Courts in the Russian Federation General Provisions Separate Categories of Disputes Considered by Non-Governmental Arbitration Courts Legislation on Non-Governmental Arbitration Courts in the Russian Federation Preconditions for Commencing Non-Governmental Arbitration Proceedings Advantages of Resolving Disputes in Non-Governmental Arbitration Courts Alternative Dispute Resolution General Provisions Contractual Relations Labor Law Bankruptcy Law Enforcement Proceedings. Bankruptcy Enforcement Proceedings General Provisions Initiating Enforcement Proceedings Enforcement Measures Priority of Satisfaction of Claims Bankruptcy General Provisions Particular Types and Stages of the Bankruptcy Procedure Specific Features Regarding the Bankruptcy of Certain Categories of Debtors Banking and Finance Law Banking Activities General Overview of the Banking System The Central Bank of the Russian Federation Licensing Transition to International Banking Standards Requirements for Russian Banks Banks with Foreign Participation 144 V

9 9.1.7 Specialized Mortgage or Construction Savings Banks Non-Banking Activities of Banks Money Laundering Legislation Deposit Insurance Credit History Bureaus Currency Regulation General Overview Currency Operations Bank Accounts of Non-Residents Repatriation of Earnings Residents Reports on Currency Transactions Securities Legislation Regulation of the Securities Market Shares and Corporate Bonds Depositary Receipts Investment Funds Unit Investment Funds Joint Stock Investment Funds Management Company of an Investment Fund Specialized Depositories for Investment Funds Investment Fund Shares Protection of Intellectual Property General Information on the Legal Regulation of Intellectual Property Regulation of Intellectual Property in Russia Brief Overview of Types of Protected Objects Trademarks and Service Marks Definition Types of Trademarks Origin of Rights, Scope of Protection, and Protected Rights Well-known Trademarks Participation of the Russian Federation in International Treaties Transfer of Rights to a Trademark Brand Concept of Brand Exclusive Right to a Brand A Brand s Relationship to Other Means of Individualization Copyright and Related Rights Copyright Protection and Related Rights in Russia Copyright Objects Extent and Scope of Copyright Protection Disposal of Copyright Protection of Computer Programs and Databases 179 VI

10 Right of a Database Producer Industrial Property Industrial Property Patent Law Objects, Registration Criteria Patents for Industrial Properties Extent and Scope of Protection International Mechanisms for Patent Protection Transfer of Rights to a Patent Right to a Production Secret (Know-how) Changes in Legislative Regulation Definition Trade Secret Protection Exclusive Right to a Production Secret (Know-how) Disposal of the Exclusive Right to a Production Secret Ownership of the Exclusive Right to a Production Secret Liability for a Breach of the Exclusive Right to a Production Secret Protection of Rights in the Intellectual Property Sphere Competent State Authorities Consequences of Infringement and Remedies 194 Contacts 196 VII

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12 Preface BEITEN BURKHARDT s Russian team is glad to present a new edition of the brochure on investing in Russia. In 2012 we present what is already the 10th edition of the brochure. This year marks twenty years since the international law firm BEITEN BURKHARDT started working on the dynamically developing Russian market. After opening offices in Moscow (in 1992) and Saint Petersburg (in 1996), BEITEN BURKHARDT became the first German law firm to work for clients in two of the largest and most important Russian regions economically. We are deeply grateful to our clients for the confidence that they have shown us over the past two decades. As in the past we have developed this brochure not only to acquaint potential investors with the fundamentals of Russian law, but also to enable businessmen already operating in Russia and keen to obtain up-to-date information on legislative amendments to use it as a reference guide. In this revised edition we have once again reviewed legislative innovations and also set out our practical recommendations based on our experience of implementing joint projects in Russia with our clients. We sincerely hope that, based on our successful practice, we have managed to include in the brochure forecast and well-planned ways of establishing a business and operating in Russia. Should you have any questions, please do not hesitate to contact us our best lawyers and attorneys in Moscow and Saint Petersburg are at your disposal. You will find contact details on the last page of the brochure. In closing, we would like to point out that we issue newsletters on a regular basis which you will find on our website. We would also be glad to include you in our electronic distribution list. BEITEN BURKHARDT Moscow Saint Petersburg September

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14 1. Special Framework Conditions for Foreign Investors 1.1 Legislative Basics The document regulating foreign investments in the Russian Federation is the Federal Law On Foreign Investments in the Russian Federation No. 160-FZ dated July 9, 1999 (hereinafter the Law on Foreign Investments ). In addition to the said law, which determines and guarantees the fundamental rights of foreign investors, there are other regulatory acts that are both directly and indirectly aimed at governing relations connected to investment. Such regulatory acts include, for instance, the Federal Law On Agreements for the Division of Commodities No. 225-FZ dated December 30, 1995, and the Federal Law On the Procedure of Carrying Out Investment in Businesses which have Strategic Significance in the Provision of National Defense and Security, No. 57-FZ dated April 29, In addition, investors may be granted certain extra guarantees under bilateral international agreements concluded by the Russian Federation. In particular, assistance agreements on the conduct and mutual protection of capital investments have been concluded with the governments of states including Switzerland, Norway, Italy, USA, Japan, and China. Furthermore, the Russian Federation is the legal successor to the former USSR under similar agreements concluded with the governments of Germany, France, Great Britain, Austria, and Finland. 1.2 Content of the Law on Foreign Investments Basic Provisions Foreign investments in the Russian Federation may be carried out in any form not specifically prohibited by legislation of the Russian Federation. The legal structure provided for foreign investors in the Russian Federation is analogous to the one provided for Russian organizations. Any restrictions on the rights of foreign investors may be imposed only by federal law, and only to the extent necessary for the protection of fundamental constitutional principles, morals, health, rights and lawful interests of other persons, and for the provision of national defense and security. Any property belonging to foreign investors or commercial organizations in which foreign investors have an interest may not be the subject of seizure. Exceptions to this rule may only be established by a legislative procedure and must provide compensation for losses. 3

15 Upon payment of the relevant taxes and charges stipulated by Russian Federation legislation, foreign investors are entitled to freely use revenues and profits in the Russian Federation, as well as to transfer these same revenues outside Russia. Foreign investors may transfer their rights and obligations to another party on the basis of an agreement. Additionally, foreign investors are granted the right of reimbursement for losses inflicted by unlawful actions (or omissions) by state or local authorities, or by officials thereof Priority Investment Projects When foreign investors undertake direct investments or implement priority investment projects, they may be granted certain concessions and additional guarantees. Direct investments carried out by a foreign investor are construed as: a foreign investor s acquisition of no less than 10% of the shares in the charter capital of an already existing or newly established commercial organization in the Russian Federation, in the form of an economic partnership or a company in accordance with Russian Federation civil legislation; a contribution of funds to the fixed assets of a foreign legal entity s branch to be established in the Russian Federation; acting as a lessor in the Russian Federation with respect to particular types of equipment, having a customs value of no less than 1 million rubles. A priority investment project is an investment project that simultaneously meets the following two conditions: The total volume of investment in the project is equal to no less than 1 billion rubles (or the equivalent in a foreign currency, at the exchange rate of the Central Bank of the Russian Federation on the date the Law on Foreign Investments came into force approximately EUR 40,000,000), or the share of foreign investment in the charter capital of a commercial organization implementing the project is equal to no less than 100 million rubles (or the equivalent in a foreign currency at the exchange rate of the Central Bank of the Russian Federation on the date the Law on Foreign Investments came into force approximately EUR 4,000,000); The investment project is included on the list of priority investment projects to be approved by the Government of the Russian Federation. It should be noted that at the time this brochure was drafted, this list of priority investment projects had not yet been approved. 4

16 The Law on Foreign Investments provides foreign investors with a guarantee, widely used in international practice, of protection from negative changes in the legislation of the host country (the grandfather clause ). In accordance with Article 9 of the Law on Foreign Investments, new federal laws and other legal regulatory acts of the Russian Federation that increase the total tax burden on the activities of an investor and commercial organization with foreign investments, or which establish a less advantageous regime with respect to foreign investment, shall not be applied within the payback period of the project, but not for longer than seven years from the commencement date of the financing of this project through foreign investment. The guarantee of protection from negative changes in Russian Federation legislation is applied in relation to investors and commercial organizations with foreign investment that implement priority investment projects (regardless of the size of the share of foreign investment in the charter capital), as well as in relation to commercial organizations in whose charter capital the share of foreign investment exceeds 25%. This guarantee is valid with respect to the following taxes: federal taxes (with the exception of excise taxes and VAT on commodities produced in the Russian Federation); payments to state non-budgetary funds (with the exception of payments to the Pension Fund of the Russian Federation). Russian Federation tax legislation does not currently provide protection for investors from negative changes in legislation, which makes this guarantee difficult to implement in practice. 1.3 Restriction of Foreign Investors Activities The theoretically equal status of foreign and local investors in the Russian Federation does have exceptions. For instance, investment by foreign individuals in the banking and insurance spheres is restricted, as well as investment in businesses that are strategically important Banking Sector The Federal Law On Banks and Banking Activities No. 395-I dated December 2, 1990, details additional requirements for the foundation and commercial activities of credit institutions with foreign investment, and branches of foreign banks in the Russian Federation. In accordance with Article 18 of the above-mentioned Federal Law, the admissible share of foreign capital in the banking system of the Russian Federation shall be established through a legislative procedure. The admissible share of foreign capital in the banking system of the Russian Federation is calculated as a ratio of the total amount 5

17 of stakes belonging to foreign investors in the charter capitals of credit institutions and the amount of stakes belonging to foreign banks to the total amount of capital of all credit institutions registered in the territory of the Russian Federation. The Central Bank of the Russian Federation is entitled to prohibit an increase in charter capital or an alienation of shares in the charter capital of credit organizations, if as a result of such actions the admissible share of foreign capital in the banking system of the Russian Federation will be exceeded. However, the federal law that establishes the admissible share of foreign capital in the banking system of the Russian Federation has not yet been adopted Insurance Services Sector The basic legal act regulating the insurance services sector is the Law of the Russian Federation On the Organization of Insurance Business in the Russian Federation No dated November 27, 1992, which establishes certain restrictions on foreign insurance organizations activities through their subsidiaries and associated companies in Russia. According to Article 6 of the above-mentioned law, subsidiaries of foreign investors (foreign insurance companies) and insurance organizations, in which the foreign investors share of charter capitals exceeds 49%, may not provide compulsory insurance or life insurance. They also may not provide compulsory state insurance or issue property insurance related to making deliveries or performing works for the state, or insure the property interests of state and municipal organizations. It should be noted that these restrictions do not cover instances in which foreign investors are companies from EU countries. An insurance organization, which is a subsidiary of a foreign investor, has the right to carry out insurance activities in Russia, provided the foreign investor has existed as an insurance company for at least 15 years, is performing its activities in accordance with the legislation of the state of incorporation, and has been participating, for at least 2 years, in the activities of insurance companies established in Russia. The share (quota) of foreign capital in the charter capital of any insurance company registered in Russia may not exceed 25%. When the indicated maximum allowable shareholding is either reached or exceeded, the controlling authority, responsible for the supervision of the insurance sector, stops issuing permits for the performance of insurance activities to subsidiaries of foreign insurance companies and insurance organizations, in which the foreign investors share exceeds 49%. The permission (preliminary consent) of the insurance supervisory authority is required for transferring shares in the charter capitals of Russian insurance companies to foreign investors and their subsidiaries. 6

18 Any increase in the capital of an insurance company through funds from foreign investors and their subsidiaries also requires prior permission from the insurance supervisory authority Investments in Businesses which are Strategically Important The Federal Law On the Procedure of Foreign Investment in Businesses which are Strategically Important for National Defense and Security No. 57-FZ dated 29 April, 2008 (hereinafter the Law on Foreign Investment in Businesses which are Strategically Important ), establishes restrictions on foreign investors who purchase shares in businesses which are strategically important for national defense and security, as well as during the completion of other deals with foreign investors that result in the establishment of control over these businesses. A business which is strategically important for national defense and security (hereinafter a business which is strategically important ) is a company created in the Russian Federation with limited liability, an additional liability company, or a joint stock company, which carries out at least one type of activity which is strategically important. The Law on Foreign Investments in Businesses which are Strategically Important outlines forty two types of such activity, which can be consolidated into several groups: activity connected with nuclear material or radioactive substances; development, production, distribution, renovation, or use of military technology, weapons, ammunition and explosive materials; space activity, activity related to aviation security, development, production, testing and overhaul of aviation technology; activity in the field of mass information; development, production, distribution or technical service of encoded (cryptographic) assets; development, production, distribution and identification of electronic machinery intended for the secret gathering of information; surveying and extracting valuable substances from the subsoil of land plots of federal importance, and the storage of biological water resources; activity connected with the use of infectious disease agents; work involving hydrometeorological and geophysical processes and phenomena. 7

19 The limitations for a foreign investor consist of the need to receive prior consent from the authorized state body (for further information see Section 6.7 Governmental Commission for Control over Foreign Investment in the Russian Federation ) upon the completion of the following transactions: transactions (excluding transactions with respect to shares (participation interest) comprising the charter capital of a business which is strategically important and using subsoil of federal significance), the completion of which result in the foreign investor (or group) purchasing more than 50% of the voting shares (participation interest) of the charter capital of the business which is strategically important and (or) the possibility to elect more than 50% of the makeup of the board of directors (or the board of supervisors), or acquiring the right to appoint the sole executive authority or upwards of 50% of the makeup of the collegial executive body of such a business; transactions which result in the foreign investor (group of parties) acquiring the right to dispose of 25% or more of the voting shares (participation interest) of the charter capital of a business which is strategically important and using subsoil of federal significance, and (or) the possibility of electing 25% or more of the board of directors (supervisory board), or acquiring the right to appoint the sole executive body or 25% or more of the collective executive body of the business; transactions aimed at the foreign investor (group of parties) acquiring shares (participation interest) of the charter capital of a business which is strategically important and using subsoil of federal significance if the foreign investor (group of parties) has the right to dispose of 25% or more of the voting shares (participation interest) of the charter capital of the business (excluding transactions for acquisition by a foreign investor (group of parties) of shares (participation interest) in the charter capital of a business, as a result of which the share of the foreign investor (group of parties) in the charter capital of such a business will not be increased); transactions aimed at a foreign state, international organization or organization under the control thereof acquiring the right to dispose of more than 25% of the voting shares (participation interest) of the charter capital of a business which is strategically important (excluding a business using subsoil of federal significance); transactions aimed at a foreign state, international organization or organization under the control thereof acquiring the right to dispose of more than 5% of the voting shares (participation interest) of the charter capital of a business which is strategically important and using subsoil of federal significance; agreements that allow a foreign investor (an individual included in the group of parties) to perform the functions of a manager in relation to a business which is strategically important; 8

20 other transactions aimed at transferring - to a foreign investor (group of parties) - the right to determine the decisions of the management bodies of a business which is strategically important, including the conditions for it to conduct business operations. A foreign investor intending to conduct any of the said transactions or establish control over a business which is strategically important must submit a respective petition for prior consent to such a transaction, or a petition for consent to establish control, to the authorized state body. The consideration process of such a petition takes approximately three months. It is important to note that the authorized state body is entitled to make the issue of an affirmative decision conditional upon the imposition of certain obligations on the foreign investor (person included in the group of parties) (for example, the continuance of valid contracts by the business which is strategically important, maintaining prices for output (rendered services), maintaining the number of personnel, etc). Transactions for the acquisition of shares (participation interest) in businesses which are strategically important, as well as transactions entailing the establishment of control over such businesses, which are conducted without the consent of the authorized state body, are subsequently void. 9

21 2. Corporate Law 2.1 Forms of Commercial Activities in Russia Foreign investors can carry out commercial activities in Russia in various forms: export/import of goods or services with no permanent presence in Russia; on the basis of a joint venture agreement; via a representative office or branch of a foreign company; through a legal entity established under Russian law (subsidiary, joint venture). The legal status of representative offices and branches of foreign companies, as well as the organizational and legal forms of Russian legal entities most often used in practice Limited Liability Companies and Joint Stock Companies are considered in greater detail further in this section. 2.2 Representative Offices Status of a Representative Office under Russian Law A representative office does not have the status of a legal entity, but is rather a subdivision of a foreign legal entity in Russia, which represents and protects the foreign company s interests. The legal basis for the establishment and operations of representative offices is the Regulation of the Council of Ministers of the USSR On Approval of the Provision on the Procedure for the Opening and Operations of Representative Offices of Foreign Firms, Banks and Organizations in the USSR No dated November 30, The establishment and activities of representative offices of foreign banks and other lending organizations are also regulated by the provisions of the Order of the Central Bank of the Russian Federation No dated October 7, A representative office acts on behalf of, and following the instructions of, the foreign company in question and carries out activities in accordance with Russian legislation. The issue of taxation on the income of representative offices of foreign companies is regulated by Russian legislation, as well as by treaties concluded by the Russian Federation on the avoidance of double taxation. 10

22 2.2.2 Opening (Accreditation) of a Representative Office In accordance with Russian legislation, a representative office of a foreign legal entity in Russia may be opened only upon permission of the accrediting body. In particular, accreditation is required in order to open bank accounts at Russian banks, rent premises, and hire employees. A representative office can be accredited by the following organizations: a competent specialized ministry; the Chamber of Commerce and Industry of the Russian Federation; the State Registration Chamber of the Ministry of Justice of the Russian Federation. In general, to the extent permitted by law, the State Registration Chamber is preferred here, since the State Registration Chamber also maintains the Consolidated State Register of Accredited Representative Offices of Foreign Companies on the Territory of the Russian Federation. Therefore, a representative office can be both accredited and entered into the Consolidated Register at the same time. The following documents must be submitted to a registration body for accreditation of a representative office: an application requesting permission to open a representative office; an excerpt from the trade register, or another document verifying the registration of the foreign legal entity in the country where it is located; a letter of recommendation from a bank servicing the foreign legal entity, verifying its solvency; the foreign legal entity s articles of association; the decision by the foreign legal entity to open a representative office in Russia; the Provision on the representative office; the power of attorney, vesting the head of the representative office in Russia with the necessary powers; the power of attorney issued to a representative, for the purpose of representing the interests of the foreign legal entity on issues connected with the opening of the representative office; 11

23 a document confirming the representative office s address in Russia (for instance, a premise lease agreement or a letter of guarantee); letters of recommendation from at least two Russian business partners of the foreign legal entity; a card containing information about the representative office being opened. All documents executed abroad must be legalized or apostilled, and have a notarized translation into the Russian language. A permit to open a representative office is issued by a registration body for 1, 2 or 3 years, with the possibility of extending the term (for a further 1, 2 or 3 years) on the basis of an application from the foreign legal entity. If a foreign legal entity fails to apply on time to a registration body for an extension of the accreditation term, the representative office shall be considered to have terminated its operations upon the expiration of the accreditation term. At present, the State Registration Chamber charges the following fees for the accreditation of a representative office: for 1 year 35,000 rubles; for 2 years 65,000 rubles; for 3 years 80,00 rubles. The fees for extending a representative office s accreditation are: for 1 year 35,000 rubles; for 2 years 50,000 rubles; for 3 years 65,000 rubles. The issuance of a permit to open a representative office and a certificate of entry of the representative office in the register of accredited representative offices, as well as extending accreditation, usually takes 21 business days. In a case of expedited issuance (within 7 business days), 15,000 rubles must be paid in addition to the initial fee. 12

24 2.2.3 Activities of a Representative Office Management of a Representative Office The activities of a representative office are managed by the head of the representative office, who acts on the basis of power of attorney issued by the foreign legal entity. It should be noted that the powers of the head of a representative office must be certified solely by power of attorney, and may not stem solely from instructions contained in the Provision on the representative office or the foundation documents of the foreign legal entity. The head of a representative office is entitled to delegate his/her powers in full or in part to another person, if such an option is provided for by the power of attorney issued to the head of the office Main Documents of a Representative Office The mutual relations between a representative office and the foreign legal entity that established it are based on the following documents: the foreign legal entity s foundation documents; the power of attorney issued to the head of the representative office in accordance with the requirements set out above; the Provision on the representative office, which must include the following sections: the representative office s status in the foreign legal entity s hierarchy; the documents that govern the representative office s activities; the location of the representative office; the objectives in establishing the representative office, and the types of activities it will carry out; the management bodies of the representative office (the powers of the head of the representative office); the property of the representative office, and the procedure for possessing and disposing of such property; the procedure for employing regular and temporary employees of the representative office; 13

25 -- -- the procedure for submitting reports of the representative office to the authorized bodies of the Russian Federation; the procedure for terminating the activities of the representative office Engaging Foreign Employees All foreign employees of a representative office and, if necessary, members of their families may and, in some cases (e.g. foreign employees of representative offices of foreign banks) must, be personally accredited by a registration body. Personal accreditation is provided for the specified number of foreign employees stated in the permit to open the representative office. As a rule, the number of foreign personnel may not exceed five people, but this number can be increased in certain circumstances and where there are strong grounds to do so (for instance, special qualifications of foreign specialists, their unique work experience, etc.). Personal accreditation of foreign citizens confirms their official status as employees of a representative office in the Russian Federation. The registration body provides services connected with passport and visa support to accredited personnel of representative offices and members of their families. However, in most cases, the accreditation of foreign employees of representative offices is not obligatory. The procedure for foreign citizens to work in Russia is regulated by the Federal Law On the Legal Status of Foreign Citizens in the Russian Federation No. 115-FZ dated July 25, 2002, in accordance with which an employer is entitled to employ foreign personnel only if a permit to engage and use foreign employees has been obtained, and a foreign citizen has the right to work in Russia only if he/she has a work permit. By implication of this law, an employer can be either an individual or a legal entity, including a foreign legal entity having a representative office in the territory of Russia. However, the law establishes an exception to the general procedure for employees of representative offices of foreign legal entities duly accredited in Russia. This exception applies to representative offices of legal entities registered in those countries with which the Russian Federation has entered into a treaty, or if similar rules are effective in the country of incorporation of a respective foreign legal entity (e.g. based on the principle of reciprocity). Currently, there is only one such treaty, concluded between the Russian Federation and France. Thus, in most current cases foreign legal entities must ensure the issuance of work permits to foreign employees of their representative offices in Russia. Personal accreditation of an employee of a representative office does not release such employees from the necessity to obtain a work permit, nor does it release the respective representative office from the necessity to obtain a permit to engage and use foreign employees. 14

26 2.3 Branches The Federal Law On Foreign Investments in the Russian Federation No. 160-FZ dated July 9, 1999, provides for the possibility to establish subdivisions of foreign legal entities in Russia in the form of branches. A branch is a separate subdivision of a legal entity not located at the registered seat of the legal entity, and performing all or part of the functions of the legal entity, including representative functions Status of a Branch under Russian Legislation The Civil Code of the Russian Federation and the Federal Law On Foreign Investments in the Russian Federation dated July 9, 1999, No. 160-FZ, which are the legal bases for the operations of branches, reflect the main functional distinction between branches and representative offices: a branch of a foreign legal entity created in the Russian Federation performs a part, or all, of the functions, including representative functions, on behalf of the foreign legal entity by which it was created, whereas representative offices exclusively perform representative functions. Opening a branch is expedient in cases when the foreign legal entity plans to carry out active commercial activities in the Russian Federation. Among the features of branches, it should be noted that the provision for a branch must indicate the composition, volume and terms of property investments made as contributions to the fixed assets of the branch. The valuation of the property transferred to a branch should be conducted by the foreign legal entity on the basis of domestic or global prices, and the equivalent sum in rubles indicated in the provision for the branch Accreditation of a Branch There is currently no significant differences between the procedure for opening a branch and that for opening a representative office, including the documents required. In a case of opening a branch, it is not necessary to provide the accrediting body with recommendation letters from business partners, or documents confirming the address of the branch. The other documents required for the opening of a branch are identical to those required for the opening of a representative office. A permit to open a branch is issued by the State Registration Chamber for a term of 1, 2, 3 or 5 years, with the possibility of an extension for a further 1, 2, 3 or 5 years on the basis of an application from the foreign legal entity. The state duty, at the amount of 120,000 rubles, must be paid to open a branch, and the State Registration Chamber charges the following fees for accreditation: For 1 year 20,000 rubles; 15

27 For 2 years 35,000 rubles; For 3 years 50,000 rubles; For 5 years 75,000 rubles. The same fees are charged for extending the accreditation term. The issuance of a permit to open a branch and a certificate of entry in the state register during accreditation or extension of accreditation usually takes 21 business days. In the case of expedited issuance (within 7 business days), 15,000 rubles must be paid in addition to the initial fee. 2.4 Russian Legal Entities Russian legislation considers a legal entity to be an organization that either has ownership, economic control or operational management of separate assets, and is liable for its obligations with such assets, that may in its own name acquire and exercise property and personal non-property rights, bear obligations, and be a plaintiff or a defendant in court. The Civil Code of the Russian Federation is the basis for the legal regulation of legal entities. Special laws are also particularly important: The Federal Law On Joint Stock Companies No. 208-FZ dated December 26, 1995, The Federal Law On Limited Liability Companies No. 14-FZ dated February 8, 1998, the Federal Law On Production Cooperatives No. 41-FZ dated May 8, 1996, and others. Legal entities are divided into commercial and non-commercial entities. Commercial legal entities pursue profit as their main operational objective, distribute generated profit between their founders, and are entitled to carry out any type of operations not prohibited by law. Conversely, non-commercial legal entities do not pursue profit as their main operational objective; as a general rule, they do not distribute generated profit between their founders (or members) and are entitled to carry out business operations corresponding only to the objectives for which they were established and only in pursuit of those objectives Organizational and Legal Forms of Commercial Legal Entities in Russia The following organizational and legal forms of legal entities fall under the category of commercial: 16

28 unlimited partnership a partnership whose participants, in accordance with the agreement concluded between them, carry out business operations in the name of the association and bear liability for its obligations with their property; limited partnership (general partnership) a partnership in which, along with the participants carrying out business operations in the name of the partnership and being liable for the partnership s obligations with their property (full partners), there is, to a lesser degree, one participant with liability limited in the amount of its contribution, and who does not participate in the partnership s business operations; limited liability company a company whose charter capital is divided into shares; the participants in such a company are not liable for its obligations, and bear the risk of losses connected with company operations only to the extent of the value of their shares; additional liability company a company whose charter capital is divided into shares; the participants in such a company jointly and severally bear additional liability for its obligations with their property to the same extent for all, as a multiple of the value of their shares; joint stock company a company whose charter capital is divided into a particular number of shares; the participants in such a company (shareholders) are not liable for its obligations, and bear the risk of losses only to the amount of the value of their shares; production cooperative (work association) an association of individuals for the purpose of joint production and other business activities based on membership and personal labor or other participation, and on its members combining property equity contributions; unitary enterprise a commercial company that does not have the ownership right to the property allocated thereto by the owner (state and municipal enterprises are established in this legal form). In practice, commercial legal entities in which the founders are liable with their property for the obligations of such organizations are not common in the Russian Federation. The most common forms of commercial legal entities, including those through which foreign investors conduct business in the Russian Federation, are the limited liability company (LLC) and the joint stock company (open (OJSC) and closed (CJSC)) Registration of Legal Entities The Federal Law On State Registration of Legal Entities and Individual Entrepreneurs No. 129-FZ dated August 8, 2001 (hereinafter the Law on Registration ), 17

29 regulates the procedure for registering newly established legal entities. Currently, they are established on the basis of the One Window Principle, in accordance with which, and in order to have a fully functioning legal entity properly registered, it is sufficient to submit the documents to one state authority. The registration of a legal entity is carried out as follows: the organization is registered as a legal entity with the tax authorities, and concurrently registered with the state statistics bodies and extrabudgetary funds. The registration of legal entities is signified by their entry in the Single State Register of Legal Entities by an authorized regional tax body. The tax body at the location of the established legal entity is authorized to perform this function. In accordance with Article 12 of the Law on Registration, the following documents must be submitted for the registration of a legal entity: an application for state registration in the established form. The signature of the person submitting the application must be notarized. The application may be signed by the individual founder, or by the head of the founder (being a legal entity); the decision to establish the legal entity in the form of minutes of the founders meeting, or the decision of the sole founder; the legal entity s foundation documents; an excerpt from the register of foreign legal entities of the country of the founder s origin, or another certificate proving the legal status of the founder - foreign legal entity; a document showing payment of the state duty for registration of the legal entity at the amount of 4,000 rubles. In accordance with Article 8 of the Law on Registration, the state registration of legal entities is carried out within 5 business days from the moment of submission of the necessary documents to the tax body. Upon completion of the registration, the legal entity is issued a certificate of state registration. The registration authority concurrently issues the legal entity documents verifying its registration with other state bodies and extra-budgetary funds: certificate of registration as a taxpayer with the tax authority at the location of the legal entity; information letter of the regional body of the Federal Service for State Statistics on the assignment of statistics codes to the legal entity; 18

30 notice of the legal entity s registration with the regional body of the Pension Fund of the Russian Federation; notice of the legal entity s registration with the regional body of the Social Insurance Fund of the Russian Federation. In some cases, if the amount of assets or overall earnings of the founders of a legal entity exceeds the amounts established by Russian Federation legislation, then establishing a legal entity requires the preliminary consent or subsequent notification of the Russian antimonopoly authorities. The grounds and the procedure for applying to the antimonopoly authorities are described in more detail in points and of Section State Authorities Control over the Observance of Antimonopoly Legislation and Economic Concentration. 2.5 Limited Liability Companies Legal Status A limited liability company is a company founded by one or several persons, and whose charter capital is divided into shares. A limited liability company acquires legal capacity from the moment of its state registration. The legal status of a limited liability company is regulated by the Civil Code of the Russian Federation and the Federal Law On Limited Liability Companies No. 14-FZ dated February 8, 1998 (hereinafter the Law on Limited Liability Companies ) Foundation Procedure A limited liability company may be founded by one or several parties. However, a limited liability company may not have, as its sole participant, any other business entity comprised of one party. A company is founded through holding a foundation meeting, at which the founders adopt a resolution to establish a limited liability company, elect the management bodies of the company, and approve the company s articles of association. The founders of the company also conclude a written agreement on the foundation of the company, determining the procedure for carrying out joint actions in founding the company, the amount of the charter capital of the company, the amount and nominal value of the shares of each founder of the company, as well as the amount and nature of, and terms for paying for, such shares in the charter capital of the company. In the case of a foundation of a company by one party, the agreement on the foundation of the company is replaced by a resolution of the sole participant on establishing the company. 19

31 The agreement on the foundation of the company is not a foundation document of the company. However, on the basis thereof information regarding the amount of the shares of each founder is entered by the registration authority in the Single State Register of Legal Entities. The foundation document of a limited liability company is the articles of association. The articles of association must contain the following information: the name of the company, its location; the composition and authority of the management bodies of the company, the amount of the charter capital, the rights and obligations of the participants of the company; the procedure for and consequences of a company participant s exit from the company; the procedure for transferring a share to another party, the procedure for storing the company s documents, the procedure for the company to provide information to company participants and other parties, as well as other information stipulated by legislation or included in the articles of association at the discretion of its founders. From the moment of state registration the company shall maintain a list of the participants of the company, indicating information on each participant of the company, the amount of shares and payment therefor, as well as the amount of shares belonging to the company. The number of participants in the company must not exceed 50. If the number of participants exceeds 50, then the limited liability company must be converted to an open joint stock company within a year. In certain cases described in Section State Control over the Establishment, Reorganization, and Liquidation of Commercial and Noncommercial Organizations, the establishment of a limited liability company is subject to control by the antimonopoly authorities Charter Capital. Alienation of Shares The charter capital of a limited liability company is composed of the nominal value of the participation interests of the company participants. The minimum charter capital is 10,000 rubles. The minimum amount of the charter capital of a company may be paid in monetary funds, securities, other property or proprietary rights, or other rights which have monetary value. If the nominal value of a participation interest paid in-kind exceeds 20,000 rubles, the respective property must be assessed by an independent appraiser. By the time of the state registration of the company, its founders will have paid at least one half of the company s charter capital. The remaining 50% thereof is payable within a year from the moment of the state registration of the company. A participant in a limited liability company is entitled to sell or otherwise assign (ex- 20

32 change, give as a gift) their share to one or several participants in the company. The consent of the company or the other participants to such a transaction is not required, unless the articles of association of the company stipulate otherwise. A company participant is also entitled to assign its share to a third party, that is not a participant in the company. However, such an assignment may be prohibited by the company s articles of association. Company participants have the preemptive right to purchase a share (portion thereof) at the price offered to a third party, or at a price previously determined by the company s articles of association, in proportion to the amount of their share, unless the articles of association stipulate otherwise. The purchase price for a share (portion thereof) previously determined by the articles of association may be established as a fixed monetary amount or on the basis of a criterion (value of the net assets of the company, book value of the company s assets on the last reporting date, net profit of the company, among others). The articles of association may provide for the company s preemptive right to purchase a share (portion thereof) if the other participants have not exercised their preemptive right. The articles of association may also provide for the possibility of exercising the preemptive right to purchase only a portion of a share, from the entire share offered for sale. A transaction aimed at alienating a share (portion thereof) is subject to notarization. The notary forwards the information on the certified transaction to the registration authority, in order for the changes in the composition of company participants and the new amounts of their shares to be reflected in the Single State Register of Legal Entities. A company s articles of association may stipulate that transfers of shares to heirs (legal successors) of company participants are possible only with the consent of the other company participants. In the event that assigning a share to a third party is prohibited, and the other participants refuse to purchase it, or in case of refusal to consent to assignment of a share or its transfer to heirs (legal successors), the company shall pay the participant or its heirs (legal successors) the actual value of the share as determined on the basis of the company s accounting reports for the last reporting period preceding the date the participant made the respective request. In certain cases described in Section State Control over the Observance of Antimonopoly Legislation during Acquisitions of Shares in the Charter Capitals of Commercial Organizations and in Other Cases, transactions with shares in the char- 21

33 ter capitals of limited liability companies are subject to control by the antimonopoly authorities Agreements on Exercising Rights of Company Participants The participants in a company are entitled to conclude a written agreement on the exercising of the rights of company participants, which may be entered into either during the foundation of the company, or at some point thereafter. Under such an agreement, the participants undertake to exercise their rights in a certain manner, or to refrain from exercising rights altogether. In particular, the participants may establish the obligation to vote in a certain manner at the general meeting of participants in the company, to coordinate a voting pattern with other participants, to sell a share or portion thereof for a certain price and/or upon the occurrence of certain conditions, or to refrain from alienating a share or portion thereof until certain conditions have been met, as well as to carry out, in coordination, other actions concerning the management of the company, establishment, operations, reorganization or liquidation of the company. The agreement on exercising the rights of company participants is the Russian analogue of the shareholders agreement, commonly found in foreign jurisdictions Participant Withdrawal or Expulsion A company participant is entitled to withdraw from the company by alienating the share to the company, regardless of the consent of the other participants or the company, if provided for by the company s articles of association. A withdrawal of company participants from the company that results in no participants remaining in the company, or a withdrawal of the sole participant from the company, is not permitted. Company participants whose aggregate shareholding constitutes at least 10% of the company s charter capital are entitled to petition, through a judicial procedure, for the expulsion from the company of a participant who grossly violates their obligations, who makes the company s activities impossible, or who substantially hinders these activities. In a case of withdrawal or expulsion, the company participant is paid the actual value of their share, which equals the portion of the value of the company s net assets, proportional to the amount of the participant s share in the company s charter capital Management Bodies The general meeting of participants is the supreme management body of a limited lia- 22

34 bility company. The main decisions of the company (amending the company s articles of association, changing the size of the charter capital, distributing profit, reorganizing and liquidating the company) and the main rights to manage and control the company (election of the board of directors and the auditing commission of the company, approval of annual reports and balance sheets) fall within the exclusive authority of the general meeting of participants. Companies are required to hold a regular general meeting of participants once a year. All other general meetings of participants are extraordinary. The articles of association may determine the instances in which it is necessary to hold an extraordinary general meeting of participants. An extraordinary general meeting of participants may be held upon the initiative of the sole executive body (the general director) and other company management bodies, the company auditor, or participants holding at least 10% of the total votes. The Law on Limited Liability Companies regulates in detail the procedure for convening a general meeting of participants. Violation of this procedure does not entail negative legal consequences if all company participants take part in the meeting. At a general meeting of participants, participants hold a number of votes in proportion to their share in the company s charter capital. Pursuant to Article 37 of the Law on Limited Liability Companies, a simple majority of votes from the total number of votes of the company participants is required for a decision to be taken. A company s articles of association may provide for a greater number of votes. To take decisions regarding amending the company s articles of association and changing the amount of its charter capital, no less than 2/3 of the total number of votes of the company participants is required. Company participants may also take decisions without holding a meeting, by way of an absentee vote. However, not all issues may be decided by absentee vote; for instance, the company s annual reports and accounting balance sheets may not be approved in such manner. A company s articles of association may provide for the establishment of the company s board of directors (supervisory board). A company s articles of association may endow the board of directors (supervisory board s) with the authority to resolve issues related to the establishment of executive bodies and the premature termination of their powers, to decide on the company s conducting of large-scale transactions and interested-party transactions, and to resolve other issues. The articles of association may provide for the creation of an auditing commission (the election of an internal auditor). Companies with more than 15 participants are required to create an auditing commission (elect an internal auditor). 23

35 A company s current activities are managed, and all other issues not falling within the authority of the general meeting of participants and the board of directors (supervisory board) are settled, by the company s sole executive body. The sole executive body of a company acts on the company s behalf, represents its interests, and conducts transactions. The sole executive body is usually called the general director. The general director is elected either by the general meeting of participants, or by the company s board of directors (supervisory board). The general director acts on behalf of the company directly on the basis of law, without special power of attorney. The general director s powers may be limited by the articles of association. In the event of the general director conducting a transaction on behalf of the company and in doing so exceeding his powers, the transaction may be declared invalid by a court upon a claim from the company. A court will adopt a decision to recognize the transaction as invalid if the company proves that the defendant was, or should have been, aware of the limits of the powers of the general director. The agreement remains valid until the court declares it to be invalid. A company s articles of association may provide for the establishment of a collective executive body (a management council, directorate). Unlike the general director, the members of the collective executive body must hold special power of attorney in order to conduct transactions on the company s behalf. The power of attorney must be signed by the general director and certified with the seal of the company Liability of the Company and Its Participants A limited liability company is liable for its obligations to the extent of all its assets. A limited liability company is not liable for the obligations of its participants. Participants in a limited liability company are not liable for the company s obligations, and bear the risk of losses related to the company s activities only to the extent of the value of their shares. In the event that participants have not fully paid for their shares, they shall be jointly liable for the company s obligations to the extent of the value of the outstanding portion of their shares. The law on Limited Liability Companies and bankruptcy laws also allow for other cases, in which participants who- owing to their share in the company s charter capital or on another basis - have the opportunity to determine decisions taken by the company, bear liability for its obligations together with the company. Thus, for example, a parent company bears liability jointly with a subsidiary company under transactions conducted by the latter in execution of obligatory instructions of the parent company, as well as bearing subsidiary liability for debts of the subsidiary company in a case of its bankruptcy. 24

36 2.6 Joint Stock Companies Legal Status The Civil Code of the Russian Federation and the Federal Law On Joint Stock Companies No. 208-FZ dated December 26, 1995 (hereinafter the Law on Joint Stock Companies ), are the main regulatory acts that determine the legal status of joint stock companies. Legislation on securities is also significant. It is necessary to note that the legislation on joint stock companies has undergone continual modification for many years. The introduction of such amendments is due primarily to improvements in the legislative provisions that regulate the activities of joint stock companies, and to the necessity for an increased level of protection for shareholders rights. There are two types of joint stock companies: open and closed. Shares of an open joint stock company (OJSC) may be freely acquired by third parties without the consent of the company or its shareholders. The number of shareholders is unlimited. The possibility to dispose of shares in a closed joint stock company (CJSC) to third parties (not shareholders) requires the fulfillment of certain conditions, in particular the observance of the other company shareholders preemptive rights to purchase shares. The number of shareholders in a closed joint stock company may not exceed 50. If that number is exceeded, the closed joint stock company must be reorganized into an open joint stock company. A closed joint stock company may not hold an open subscription to its shares, and cannot place them with the public. The following main rules form the basis of the procedure for observing and exercising the preemptive right to acquire shares in a closed joint stock company: a shareholder intending to sell its shares must provide written notification to the other shareholders, and the company, of their intention; the term for shareholders and/or the company to exercise, if such a right is provided for by the articles of association, the preemptive right to purchase shares may not be less than ten days and may not exceed two months. The term for exercising this right ends if, prior to its expiration, written statements on either the exercise or waiver of the preemptive right have been received from all company shareholders; in the event of a sale of shares in violation of the preemptive right, any shareholder and/or the company, if the articles of association provide for such a right, may petition through a judicial procedure for the transfer of the purchaser s rights and 25

37 obligations to them. Such an opportunity is limited to the period of three months after the shareholder and/or the company learns, or should have learned, of the violation of the preemptive right Establishment of Joint Stock Companies A joint stock company is established by a decision of the founders (shareholders). A joint stock company with one shareholder may be established if such shareholder is, in turn, not another company founded by one entity. The foundation document of a joint stock company is the articles of association. The articles of association of a joint stock company must contain the following information: the corporate name of the company; its location; specification of the type of company (OJSC or CJSC); the amount of the charter capital; the number, nominal value, category and type of shares; the rights of the shareholders; the structure and authority of the management bodies, as well as other provisions stipulated by legislation of the Russian Federation. The amount of a joint stock company s charter capital equals the nominal value of all shares acquired by its shareholders. All shares of one type provide their holders with the same rights. Both ordinary and privileged shares may be issued. Privileged shares do not provide their holders with the right to vote at general meetings of shareholders, unless the law or the company s articles of association establish otherwise. At the same time, the amount of dividend on privileged shares is fixed. The minimum charter capital amount for a CJSC is 10,000 rubles, and for an OJSC is 100,000 rubles. Within three months from the state registration of the company, no less than 50% of its charter capital must be paid. The remaining 50% may be paid within one year after the company s state registration. Moreover, until payment of 50% of its charter capital has been made, the company is prohibited from conducting transactions not connected with its establishment. If the charter capital was not paid up or was not paid up in full, the shares not fully paid for fall into the disposal of the company and may be sold to new shareholders within one year. If this does not occur, the charter capital will be subject to a decrease and the unsold shares will be cancelled. Shares held by a company founder do not provide the right to vote until such shares have been fully paid for. Contributions to the charter capital may be made in cash or in the form of property. Property contributions are assessed upon agreement between the shareholders or by the board of directors (in the case of an increase in the charter capital). If the nominal value of shares paid for with property exceeds 20,000 rubles, the property contributions must be assessed by an independent appraiser. 26

38 In certain cases described in Section State Control over the Establishment, Reorganization, and Liquidation of Commercial and Non-commercial Organizations, the establishment of a joint stock company is subject to control by the antimonopoly authorities Shareholders Register and the Registration of Share Issuances In accordance with Russian Federation legislation, rights to shares, particularly title and pledge rights, arise upon the entry of the corresponding record in the shareholders register. The shareholders register is a database consisting of several documents, maintained in accordance with the rules established by law. The main function of the shareholders register is to provide for the identification of the entities registered therein, and to certify their rights to shares in the company. Joint stock companies may maintain their shareholders registers independently, or employ a special registrar for this purpose. Joint stock companies with more than 50 shareholders are obligated to employ a special registrar for the maintenance of the shareholders register. The rules for maintaining a shareholders register are regulated by the Provision on Maintaining Registers of Owners of Registered Securities, approved by Decree of the Federal Commission for the Securities Market No. 27 dated October 2, 1997 as well as by a number of regulatory acts approved by the Federal Service for Financial Markets which regulate the procedure for conducting certain operations in a register. In accordance with requirements of Russian legislation, shares issued by a joint stock company are subject to mandatory state registration with the Federal Service for Financial Markets, or its regional departments. Owners of unregistered shares are not entitled to dispose of them to third parties. The procedure for registering shares is established by the Federal Law On the Securities Market dated April 22, 1996, No. 39-FZ and the Standards for Issuing Securities and Registering Securities Prospectuses, approved by Order of the Federal Service for Financial Markets dated January 25, 2007, No. 07-4/pz-n. A registered issue of shares is assigned a unique state registration number Management Bodies The general meeting of shareholders is the supreme management body of a joint stock company. Article 48 of the Law On Joint Stock Companies determines the exclusive authority of the general meeting of shareholders. In accordance with this regulation, the exclusive authority of the general meeting of shareholders includes, in particular, the right to amend the articles of association, elect the board of directors, 27

39 adopt the rules of procedure for general meetings of shareholders, take decisions on dividend payments, and to liquidate and reorganize the joint stock company. A joint stock company is required to hold a regular general meeting of shareholders annually. Furthermore, a company is entitled to hold an extraordinary general meeting of shareholders at any time. The board of directors, the internal audit commission, the auditor, and shareholders holding no less than 10% of the shares are entitled to convene an extraordinary general meeting of shareholders. The general meeting of shareholders is entitled to take decisions only in the event that the shareholders present at the general meeting hold more than 50% of the voting shares. As a rule, decisions of the general meeting of shareholders are taken by a simple majority of the votes of the shareholders taking part in the meeting. Other requirements as to the number of votes necessary for taking decisions may be established only by law. In particular, decisions on amending the articles of association or on reorganizing or liquidating the company are taken by a three-quarters majority of the votes of the shareholders present at the general meeting of shareholders. Shareholders that did not participate in a general meeting, or who voted against, and whose rights were infringed upon by a taken decision are entitled to contest that decision of the general meeting of shareholders through a judicial procedure. The board of directors has authority over those general issues of company management which lie outside the authority of the general meeting of shareholders. If a joint stock company has less than 50 shareholders, the articles of association may determine that the functions of the board of directors shall be carried out by the general meeting of shareholders. The members of the board of directors are elected by a general meeting of shareholders through cumulative voting, for the period until the next annual general meeting of shareholders; however, their powers may be terminated prematurely. The Law On Joint Stock Companies determines the minimum quantitative composition of the board of directors: in accordance with the general rule, the board of directors shall be comprised of at least 5 members; however, if the number of shareholders (holders of voting shares) exceeds 1,000, - 7 members, if there are more than 10,000 shareholders 9 members. For the purposes of coordinating its activities, the board of directors elects one of its members to be the chairperson of the board of directors. The auditor or auditing commission (internal auditor) is the supervisory body of a joint stock company. It primarily controls the joint stock company s financial and business activities. 28

40 2.6.5 Executive Bodies of a Company The general director is the sole executive body of a joint stock company. The general director manages the company s current activities, represents its interests, and conducts transactions on the company s behalf without special power of attorney. The general director s powers may be limited by the articles of association. Such limitations are in force with respect to third parties if they were, or should have been, aware of the existing limitations. Aside from the general director, the company may additionally establish a directorate or management board as the collective executive body of the company. The chairperson of the collective executive body of a company is the general director. The sphere of authority of the general director and the directorate (management board) is determined by the articles of association. The members of the directorate (management board) need special power of attorney for concluding agreements on the company s behalf. With the consent of the board of directors, the general meeting of shareholders may delegate company management functions to a separate individual (manager) or organization (management company). The appointment of the general director and the directorate (management board) lies within the authority of the general meeting of shareholders, unless the company s articles of association vest such authority in the board of directors. The powers of the general director and the members of the collective executive body of a limited liability company described above (see Section Management Bodies above) are also applicable to the powers of the general director and the members of the directorate (management board) of a joint stock company Liability in a Company A company is liable for its obligations to the extent of all its assets. Shareholders are not liable for the obligations of the company and bear the risk of losses only to the extent of the value of the shares held by them. Shareholders that have not paid for their shares in full are jointly and severally liable for the company s obligations to the extent of the outstanding value of the shares held by them. Effective legislation establishes additional grounds for shareholders liability for the company s obligations. In particular, pursuant to the Law on Joint Stock Companies, a parent company that is entitled to give binding instructions to its subsidiary company bears joint liability for the subsidiary company s obligations, that were incurred as a result of adhering to these instructions from the parent company. 29

41 The parent company bears subsidiary (additional) liability for the subsidiary company s obligations if the subsidiary company is declared bankrupt due to the fault of the parent company. The members of the board of directors, the sole executive body, the members of the collective executive body of the company, the management organization or the manager bear liability toward the company for losses caused to the company by their wrongful acts (omissions). 30

42 3. Bases of Legislation on Real Estate 3.1 General Characteristics of the Existing System for Legal Regulation in the Field of Real Estate A legislative basis, necessary for ensuring the stable and effective development of the real estate market, has formed in Russia. The main laws that regulate real estate commerce in Russia are the following: The Civil Code of the Russian Federation; The Land Code of the Russian Federation; The City Planning Code of the Russian Federation; The Forest Code of the Russian Federation; The Federal Law On State Registration of Rights to Real Estate and Transactions Therewith No. 122-FZ dated July 21, 1997; The Federal Law On Turnover of Agricultural Land No. 101-FZ dated July 24, 2002; The Federal Law On Concession Agreements No. 115-FZ dated July 21, 2005; The Federal Law On Mortgage (Pledge of Real Estate) No. 102-FZ dated July 16, 1998; The Federal Law On Participation in Share Participation Construction of Apartment Buildings and Other Real Estate Objects and on Amending Certain Legislative Acts of the Russian Federation No. 214-FZ dated December 30, 2004; The Federal Law On State Cadastre of Real Estate No. 221-FZ dated July 24, 2007; and others. Also, a state system for registering real estate, rights thereto, and transactions therewith exists in Russia. Existing court practice shows evidence of the increased effectiveness of court protection of rights and lawful interests of real estate owners and investors working in the real estate market. In general, the system of legal regulation that exists in Russia meets the needs of a 31

43 developed real estate market. At the same time, it is necessary to bear in mind that there are a number of legal regulation particularities that are specific to Russia. Thus, in Russia, the title to a building and the title to the land plot on which the building is situated may still exist separately. The following traditional rights to real estate are recognized in Russia: title, lease right, pledge right, servitudes. In addition, there are also rights that are atypical for other countries, such as, for instance: right to perpetual (unlimited) use of a land plot, right to lifetime inherited possession of a land plot, right to gratuitous limited use of a land plot. It is important to note that in Russia a number of restrictions have been imposed on foreign legal entities and individuals rights to land. In certain cases, restrictions are also applicable to Russian legal entities, in whose charter capitals foreign entities hold shares. 3.2 State Registration of Real Estate and Registration of Rights Thereto In Russia there are currently two systems: a system of state registration of real estate and a system of state registration of rights to real estate and transactions therewith. Moreover, the state registration of land plots and other real estate is carried out in different ways. Nonetheless, current legislation will soon provide for a significant change to the existing procedure by unifying the aforementioned registration systems. By 2013, the unification of the procedures for registering land plots and other real estate is planned. This will result in the creation of a unified state cadastre of real estate a systematized collection of information on all real estate registered in Russia. A unified federal information system is being developed that contains not only information on real estate, but also information on rights to real estate and transactions therewith. At some point in the future, the introduction of universal registration procedures, that will preclude 32

44 duplication of information in the state real estate cadastre and the register of rights to real estate, is planned State Registration of Land Plots Land plots in Russia are subject to state cadastral registration. Conducting transactions with land plots that have not undergone state cadastral registration is not permitted. In the course of cadastral registration, in the state cadastre of real estate information is entered on the borders and area of the land plot, its cadastral number, the buildings and structures located on the land plot, as well as other unique characteristics of the plot. Cadastral registration results in the creation of a cadastral passport of the land plot. The state cadastral registration of land plots is carried out by regional bodies of the Federal Service for State Registration, Cadastre and Cartography at the location of the land plots. The procedure for carrying out a state cadastral registration is regulated in detail by the Federal Law On State Cadastre of Real Estate dated July 24, 2007, No. 221-FZ State Registration of Other Real Estate The state registration of buildings, structures, premises and unfinished construction projects (jointly referred to as capital structures) is carried out by conducting the technical registration of these facilities. Real estate is individualized within the framework of the system of state technical registration (description, determination of the technical characteristics, assignment of cadastral numbers). State technical registration results in the creation of cadastral and technical passports for the real estate. These documents contain information on the main parameters of the real estate (address, area, cadastral number, designation, stories, etc.) as well as its plan. A cadastral passport contains the information about the real estate that is required for the state registration of rights thereto or transactions therewith. The technical passport contains more detailed (in comparison with the cadastral passport) information about the technical characteristics of the real estate. When reviewing the cadastral or technical passport for real estate an investor must pay special attention to the designation of the property, i.e. determine whether the property is residential or non-residential. It should be remembered that in Russia it is prohibited to use residential premises for commercial activities (for example, locating offices, stores, etc.). At the same time, it is possible to convert premises from residential to non-residential upon receipt of a special permit from local authorities. In a case involving a change in the technical characteristics of real estate due to altera- 33

45 tions, reconstruction, a change in the level of utilities development, etc., it is necessary to reflect these changes in both the cadastral and technical passports. The system of technical registration of real estate is currently undergoing both structural and qualitative changes. It is intended that as of January 1, 2013, the procedure of technical description and registration of capital structures will have been fully altered and will be similar to the existing procedure of cadastral registration of land plots State Registration of Rights to Real Estate The existing system of state registration of rights to real estate in Russia is established by the Federal Law On State Registration of Rights to Real Estate and Transactions Therewith dated July 21, 1997, No. 122-FZ (hereinafter the Law on State Registration of Rights to Real Estate ). As a general rule, rights to real estate and transactions therewith are subject to obligatory state registration in the Single State Register of Rights to Real Estate and Transactions Therewith. The state registration is a legal act of the state s recognition and confirmation of rights to real estate. The right to lease real estate is an exception to the general rule, but only if such a right is established for a period of less than one year. In addition, rights to real estate that commenced prior to the entry into force of the Law on State Registration of Rights to Real Estate, i.e. prior to January 31, 1998, are recognized without the state registration. The Federal Service for State Registration, Cadastre and Cartography is charged with maintaining the Single State Register of Rights. Regional subdivisions (departments) of the Federal Service, which maintain the register and implement registrations of rights and transactions with real estate, are present in all regions of Russia. State registrations of rights to real estate and transactions therewith are implemented at the locations of such real estate. The Law on State Registration of Rights to Real Estate determines the registration procedure, the required documents, as well as other procedural issues. It is important for investors to realize that the fact of state registration of rights to real estate, in and of itself, is not an absolute guarantee of the protection of the rights and interests of investors. A state registration of rights to real estate may be annulled by a court decision, where the governmental act or agreement which serves as the basis for the registration of the rights has been deemed invalid. Therefore, an independent legal expert evaluation of the rights to be acquired by the investor is a necessary condition for any transaction involving real estate in Russia. 34

46 3.3 Acquiring Rights to Land Plots Types of Rights The main types of rights to land plots provided for by Russian legislation are: title; lease right; right to perpetual (unlimited) use of a land plot; right to lifetime inherited possession of a land plot; right to gratuitous limited use of a land plot; servitude Acquiring Rights Rights to land plots may be acquired from private entities (legal entities and individuals) as well as from state and local authorities. In any case, it is important for an investor to know who the owner of the land plot is, and what authority the entity intending to transfer the rights to the land plot has. The extent of the legal authority of right holders is determined on the basis of title documents. As such, documents an investor may be provided with include acts of state or local authorities, certificates of state registration of rights, agreements, etc. A thorough legal expert evaluation of such documents allows an investor to obtain the necessary information about those rights to the land plot that the investor intends to acquire. Only land plots whose borders are established in accordance with current legislation, and concerning which cadastral registration has been conducted, may be an object of rights. A right to a land plot may arise on various grounds, for instance it may stem from agreements, acts of state or local authorities, court rulings, etc. A right to a land plot arises only upon its state registration in the Single State Register of Rights to Real Estate and Transactions Therewith, with the exception of a lease right for a term of less than one year. Rights may be acquired only to land plots that are not withdrawn from commerce. The Land Code of the Russian Federation establishes a closed list of certain types of land 35

47 plots, the turnover of which is prohibited. In particular, such land plots include state wilderness reserves and national parks, as well as land on which objects connected to the provision of national security and defense are located. It should be noted that if buildings (structures) situated on a land plot belong to the owner of the land plot, such a land plot may not be acquired without the buildings (structures) located thereon Restrictions on the Rights of Foreigners As a general rule, foreign citizens, legal entities, and Russian legal entities in whose charter capitals shares are held by foreigners, are entitled to acquire the same rights to land plots as Russian citizens and legal entities without foreign participation. Agricultural land plots are the exception to this rule. Foreign individuals and legal entities, and Russian legal entities with more than 50% foreign share participation in their charter capitals, are only entitled to the right to lease agricultural lands. In addition, pursuant to the Land Code of the Russian Federation, foreign entities may not have titles to land plots located on border territories, the list of which is established by Decree of the President of the Russian Federation No. 26 dated January 9, 2011, and other specifically determined territories (e.g. within the borders of sea ports) Status of a Land Plot While choosing a land plot, an investor should carefully study the land plot s status. In particular, the investor should determine which category, from the seven land categories established by the Land Code of the Russian Federation, the land plot belongs to. It is also important to know which regional zone the land plot has been assigned to, pursuant to the rules of land use and development, as well as the type of use permitted for the land plot, in accordance with city planning rules. It should be remembered that owners of land plots are obliged to use them in conformity with their designated purpose, the particular land category to which they belong, and their permitted use. The law specifies administrative liability for breaking these established rules. 3.4 Acquiring Rights to Buildings and Structures Investors are entitled to acquire titles to buildings (structures) that already exist or are under construction, or to construct them independently. No restrictions on acquiring rights to buildings (structures) have been established for foreign individuals and legal entities, or for Russian legal entities with foreign participation. 36

48 3.4.1 Acquiring an Existing Building (Structure) In the case of the acquisition of an existing building (structure) it is important to verify the status of the building (structure). It is necessary for the investor to know whether the building is residential or non-residential, whether it has the status of a historical or architectural landmark, etc. The investor s opportunities to further use the building (structure) depend on these characteristics. In acquiring the title to a building (structure), the investor should know that certain rights pertaining to the land plot on which the building (structure) is located are also simultaneously acquired. If a building (structure) to be acquired by an investor and the land plot located thereunder belong to one entity, then the building (structure) must be sold to the investor together with the land plot. If a land plot - located under a building (structure) - is of interest to an investor but does not belong to the owner of the building (structure) in question, the investor is entitled to demand that the same rights to the land plot which belonged to the building s (structure s) former owner be transferred to the investor. In a case involving the sale of such land plot, the building s (structure s) owner has the preemptive right to purchase it Acquiring an Unfinished Building (Structure) A building (structure) under construction or reconstruction may be the subject of real estate transactions. Subject to certain conditions, rights to such real estate may be entered in the Single State Register of Rights to Real Estate and Transactions Therewith. In the case of acquiring a building (structure) that has the status of unfinished construction, it is important to verify the existence of the rights to the land plot and the type of use permitted for the land plot on which the construction is taking place, as well as the existence of a construction permit for the building that the investor is interested in, design documentation, documents containing descriptions of the construction project, and other initial data assuring the investor of the legitimacy of the construction process Constructing a Building (Structure) In order to construct a new building (structure) an investor must acquire the rights to the respective land plot. When choosing a land plot, it is primarily important to verify which buildings and structures may be constructed on the particular plot, in accordance with the provisions of land, city planning and ecological legislation. Acquiring rights to a newly created building (structure) entails carrying out the following main steps: conducting engineering surveys and collecting initial data on the land plot; 37

49 developing design documentation and having it undergo a state expert evaluation; obtaining a construction permit; constructing the building (structure); obtaining a permit to commission the building (structure); technical and cadastral registration of the building (structure); registration of the investor s title to the building (structure). The investor s compliance with all of the above steps is a material condition for acquiring rights in relation to the newly constructed building (structure). 3.5 Real Estate Pledge In Russia, real estate may be the subject of a pledge (mortgage) for securing the performance of obligations of both the real estate owner and third parties. The most common case is pledging real estate is in connection with obtaining credit or a loan. The Civil Code of the Russian Federation and the Federal Law On Mortgage (Pledge of Real Estate) No. 102-FZ dated July 16, 1998, regulate the procedure for pledging (mortgaging) real estate. A pledge commences on the basis of an agreement between the pledger and the pledgee, or by virtue of direct reference of law. The most common example where a pledge commences by virtue of law involves payment for real estate under a sale and purchase agreement after a certain period of time from the transfer to the purchaser (sale on credit), as well as the acquisition or construction of real estate facilities using borrowed funds. In a case of a pledge of real estate on the basis of a pledge agreement, the parties shall specify therein the subject of the pledge and its valuation, the essence and amount of, and deadline for, carrying out the obligations secured by the pledge. Pledge agreements must be concluded in writing and registered in the Single State Register of Rights to Real Estate and Transactions Therewith. An agreement is deemed to be concluded and enters into force from the moment of its state registration. Mortgaging a building (structure) is allowed only with a simultaneous mortgage, under the same agreement, of the land plot on which such a building (structure) is located, or of the pledger s lease right to the plot. As a general rule, foreclosure of a subject of a pledge in the event of non-performance 38

50 of the main obligation is carried out through a judicial procedure. The foreclosure of pledged property without recourse to a court (through an extrajudicial procedure) is permitted, provided that it is stipulated in the pledge agreement. 3.6 Concession Agreements Carrying out investment activities within the framework of concession relations is regulated in Russia by the Federal Law On Concession Agreements dated July 21, 2005, No. 115-FZ (hereinafter the Law on Concession Agreements ). This law is aimed at attracting additional private investment into the Russian economy, and ensuring the effective use of state property. A concession agreement is an agreement between an investor (concessionaire) and the Russian Federation, a constituent territory of the Russian Federation, or a municipality (concessor). In accordance with such an agreement, the concessionaire undertakes to create or reconstruct, at its own expense, the real estate specified by the concession agreement, the title to which is held or will be held by the concessor, and to operate the real estate, while the concessor undertakes to grant the concessionaire the right to possess and use the real estate. The Law on Concession Agreements contains a comprehensive list of the real estate that can be an object of a concession agreement; this is real estate withdrawn from civil commerce and real estate restricted in commerce, as well as real estate that can only be owned by the state or a municipality. It includes: production and engineering infrastructure of airports; railway transportation facilities; sea and river port facilities; motor roads; healthcare facilities, including those for sanatorium resort therapy; education, cultural and sport facilities, as well as facilities used for recreation and tourism; utility infrastructure system facilities; metro and other general use transportation facilities. The products and revenues received by the concessionaire as a result of carrying out the activities stipulated by the concession agreement are the property of the concessionaire. The same rule is established with regard to property created or acquired by 39

51 the concessionaire while implementing the concession agreement, which is not the object of the concession agreement. The term of a concession agreement is established by taking into account the term for creating (reconstructing) the object of the concession agreement, the volume of investment in its creation and the payback period for this investment, as well as other obligations of the concessionaire and the concessor under the concession agreement. A concession agreement provides for the payment of a fee by the concessionaire to the concessor, during the period of use (operation) of the object of the concession agreement. The concession fee may be established as a fixed amount in the form of payments made periodically, or as a lump sum to the respective budget, or in the form of a portion of the production (revenue) received by the concessionaire as a result of carrying out the concession operations. In certain cases, a concession agreement may not provide for a concession fee. A concession agreement is concluded according to the standard form by holding a tender (closed or open) for the right to conclude the concession agreement. The forms of the standard concession agreement in relation to various facilities are approved by the Government of the Russian Federation. The Law on Concession Agreements establishes a number of guarantees for investors during the performance of activities stipulated by concession agreements. These include compensation for any losses caused by the unlawful actions of state or local authorities, the equality of rights of investors (including foreign entities), and the amendment of the concession agreement if, during its term, local authority legislation or regulatory legal acts establish regulations that negatively affect the concessionaire s position, and as a result of which the concessionaire is, to a significant degree, deprived of what was expected when concluding the concession agreement (the procedure for making such amendments is determined by the concession agreement). 3.7 Participation in Share Participation Construction The subject of share participation construction agreements is the financing by share participants (hereinafter co-investors ) of the construction of real estate, as a result of which they acquire the right to demand that corresponding parts of the real estate be granted for ownership after the completion of its construction. Guarantees of protection of co-investors rights, their legal interests and property are established by the Federal Law On Participation in Share Participation Construction of Apartment Buildings and Other Real Estate Objects and on Amending Certain Legislative Acts of the Russian Federation No. 214-FZ dated December 30, 2004 (hereinafter the Law on Share Participation Construction ), which establishes several obligatory requirements for both developers and share participation construction agreements. 40

52 The Law on Share Participation Construction is subject to obligatory application in a case involving the raising of funds from citizens for the construction of apartment buildings. At the same time, the law does not cover the relations of legal entities and individual entrepreneurs that are connected with investment activities for constructing real estate but not based on a share participation construction agreement. Pursuant to the Law on Share Participation Construction, developers, i.e. entities raising funds for construction purposes, may be legal entities that hold the title or lease right to a land plot as well as a permit to construct on the said land plot. The developer undertakes to construct real estate using its own efforts and/or by engaging other entities. Thereafter, having received a permit to commission it, the developer undertakes to transfer the corresponding part of the property to the coinvestor, who has paid the contractually established amount. A share participation construction agreement is concluded in writing, and is subject to state registration in the Single State Register of Rights to Real Estate and Transactions Therewith. The Law on Share Participation Construction establishes a number of obligatory conditions that a share participation construction agreement must adhere to. The developer s performance of its obligations under a share participation construction agreement is secured by a pledge (mortgage) of real estate, or by a bank guarantee. The basis for the state registration of a co-investor s title to the corresponding part of the real estate, upon completion of its construction, is the permit to commission the real estate (provided by the developer to the authorities performing state registrations of rights to real estate and transactions therewith, no later than ten business days after receiving the permit) and the transfer act signed by the developer and the co-investor. 41

53 4. Labor Law Labor relations and other relations directly connected therewith are regulated by labor legislation consisting of the Labor Code of the Russian Federation (hereinafter the Labor Code ), other federal laws and laws of the constituent territories of the Russian Federation and regulatory legal acts containing labor law regulations, as well as collective contracts and agreements, and employers internal regulatory acts. Requirements of Russian labor legislation are also applicable to foreign citizens and companies participating in relations involving the performance of labor activities in Russia. 4.1 Employment Agreement An employment agreement is the basic document regulating relations between an employer and an employee. Entering into an employment agreement is mandatory. An employment agreement must be entered into, in writing, prior to the commencement of work. Given actual admittance of the employee to work, the employer must execute an employment agreement with him/her in writing no later than 3 business days from the date on which the employee actually began work. The mandatory provisions of an employment agreement are as follows: information about the employer and the employee; place of employment; date of commencement of work; position (labor function); conditions determining the nature of the work where necessary (mobile, details connected with travel, in transit, etc.); work and holiday time; terms of labor remuneration (salary, additional payments, premiums, bonuses); compensation for working in severe, detrimental, or dangerous conditions; provision on mandatory social insurance of the employee in accordance with Russian legislation; other terms and conditions in the cases stipulated by legislation. An employment agreement may also include other provisions not contradicting the effective legislation. 42

54 As a general rule, the provisions of an employment agreement may be amended through a written agreement of both parties. In certain cases directly stipulated by the Labor Code, the employer may unilaterally change the provisions of an employment agreement (without the employee s consent) Term of an Employment Agreement Employment agreements may be concluded for an indefinite term (unlimited agreements) or for a fixed term not exceeding 5 years (fixed-term agreements). Generally, employment agreements are concluded for an indefinite term. A fixed-term employment agreement may be entered into only in cases directly stipulated by the Labor Code and other federal laws, for instance: for a period in which an individual is fulfilling the duties of an absent employee, for whom the position is preserved; for a period of temporary (up to 2 months) or seasonal work; for a period in which work is carried out that is beyond the employer s usual activities; etc. By agreement of the parties, a fixed-term employment agreement may also be concluded with executives, deputy executives and chief accountants of an organization; persons combining jobs; persons studying full time and other persons specified by the Labor Code. Entering into a fixed-term employment agreement in cases not stipulated by the Labor Code or other federal laws is not permitted. In a case where neither party has requested termination of a fixed-term employment agreement upon expiration of its term, and the employee continues to work after the expiration of the employment agreement, the agreement is deemed to have been concluded for an indefinite term. 4.2 Probation Period In accordance with Russian labor legislation, a probation period may be initiated for an employee in order to verify his/her suitability for the job in question. Probation may be initiated for a period of up to 3 months. For executives and their deputies, chief accountants and their deputies, executives of branches or representative offices, the maximum probation period may be up to 6 months. Probation may not be initiated for certain categories of employees specified by the Labor Code, in particular for pregnant women; women with children up to 1.5 years of age; persons under 18 years of age; specific categories of young specialists, etc. During the probation period the employer has the right to terminate an employment agreement with an employee who has failed to satisfy the required demands of the position, under a simplified procedure. In such a case, the employer must notify the employee of the termination of the employment agreement, in writing, at least 3 days in advance. Moreover, the employer must state the reasons for which the employee is deemed unsuitable for the position. 43

55 4.3 Compensation The amount of the compensation, as well as its components (salary, bonuses, additional payments, premiums, etc.), must be specified in the employment agreement. When determining a salary, it should be noted that the amount thereof may not be less than the federal minimum wage, which is required by federal law for the entire territory of the Russian Federation. On the date of the preparation of this brochure, the federal minimum wage is 4,611 rubles. Moreover, a salary may not be less than the regional minimum wage required in the constituent territories of the Russian Federation annually. Therefore, in 2012, the minimum wage in Moscow is 11,700 rubles, 9,000 rubles in Moscow Oblast, 7,781 rubles in St. Petersburg, and 6,470 rubles in Leningrad Oblast. Salaries must be paid at least every half-month in the currency of the Russian Federation, i.e. in rubles. During a period of temporary disability (through illness or injury) an employee is paid temporary disability benefit. The amount of the said benefit depends on the accumulated period of work and the average daily wage. The latter may not exceed the maximum wage established by law. The benefit for the first 3 days of temporary disability is paid at the employer s expense, and for the remaining period, starting from the 4 th day of temporary disability at the expense of the Social Insurance Fund of the Russian Federation. 4.4 Working Hours The normal duration of working hours may not exceed 40 hours per week. By agreement between an employee and an employer, part-time work may be established. The employer must establish a part-time working day for certain categories of employees, upon their request. Such employees include: pregnant women; one of the parents (guardians, custodians) who have a child aged up to 14 years, or who have a disabled child up to 18 years; persons caring for a family member who is ill. In the case of part-time work, the employee s labor is paid pro rata according to either the time worked by him/her or the amount of work performed. Russian labor legislation provides for the possibility of establishing various working schedules, i.e. various means of distributing work within a certain period (week, month, quarter, etc.), including the standard working day, the non-standard working day, flexible working hours, a record of cumulative hours worked. Engaging an employee in overtime work is permitted, as a rule, subject to the employee s written consent. The maximum duration of overtime is 4 hours within 2 consecutive days, and 120 hours per year. Overtime shall be compensated for by granting the employee additional holiday allowances, or by paying the employee at least one and a half times 44

56 the regular hourly rate for the first two hours, and at least twice the regular hourly rate for any further hours of overtime. 4.5 Leave Each employee shall be granted at least 28 calendar days of paid leave per annum (basic paid leave). An employment agreement, collective agreement, or internal regulatory acts of the employer may also provide for an employee to be granted additional paid leave, the duration of which is not limited by law. As a general rule, leave is granted to employees in calendar days. Upon agreement between the employee and the employer, the annual leave may be divided into parts. At least one part of the leave must not be less than 14 calendar days. The employee may be granted short-term unpaid leave, the duration of which shall be agreed by the employee and the employer. Such leave shall be granted due to family circumstances or other valid reasons, upon the employee s written application. 4.6 Statutory Holidays Russian labor legislation establishes 12 statutory holidays per year, namely: January 1, 2, 3, 4, 5, 6 and 8 New Year holidays; January 7 Christmas; February 23 - Defender of the Fatherland Day; March 8 - International Women s Day; May 1 Spring and Labor Day; May 9 Victory Day; June 12 Russia Day; November 4 National Unity Day. If a holiday falls on a day-off, the following working day becomes non-working. Any holidays falling during a period of paid leave are not included in the calendar days of the leave. Work on holidays and days-off is prohibited, except in the cases provided for by law, and, as a rule, requires the employee s written consent. Such work should be paid as a rule at a rate of at least twice the regular rate. 45

57 4.7 Secondary Employment. Prohibited Competition During the time free from the main work an employee is entitled to perform additional, regularly paid work for the same employer (internal secondary employment) or for another employer (external secondary employment). The working hours at a secondary job should not as a rule exceed 4 hours per day. It is permissible to conclude secondary employment agreements with an unlimited number of employers. In accordance with Russian legislation, an employment agreement may not stipulate that the employee is prohibited, for the term of the employment agreement, from performing work or business activities that compete with the employer s activities. Exceptions are only made in respect of restrictions on secondary employment for general directors and, in specific circumstances, the members of the management committee of the company. An employee must also not be prohibited from compe- ting with his/her employer following the expiration of the employment agreement. 4.8 Trade Secrets Legislation on trade secrets obligates the employee to observe the trade secrets regime established by the employer, and not to disclose confidential information. Should an employee breach the obligation not to disclose information constituting a trade secret, the employer may dismiss the employee in question and demand that he/she compensate the employer for the direct damage caused by his/her actions (lost profit is not classified as compensable). An employee may be held liable provided that the employer has taken preventive measures for the protection of its trade secrets, namely: establishing a list of information, constituting trade secrets; restricting access to information constituting trade secrets by establishing a procedure for processing such information, and establishing control over the observance of such a procedure; registering persons having access to information constituting trade secrets, and persons to whom such information is disclosed; regulating relations arising from the use of information constituting trade secrets with employees on the basis of employment agreements, and with counteragents on the basis of civil law contracts; marking physical media containing confidential information or including in the details documents containing such information as Trade Secrets with an indication of the owner of such information. 46

58 Moreover, in order to protect trade secrets, the employer is obligated to: familiarize employees with the list of information constituting trade secrets of both the employer and its counteragents; familiarize employees with the trade secrets regime established by the employer, and with liability for the breach thereof; create the necessary conditions for the observance of the trade secrets regime. It should be noted that the disclosure of information constituting an employer s trade secrets may result not only in the employee being held liable within the framework of labor relations, but also in he/she being facing criminal responsibility in accordance with Article 183 of the Civil Code of the Russian Federation. 4.9 Termination of Employment Agreements An employment agreement may be terminated only on the grounds stipulated by the Labor Code or other federal laws. Dismissing an employee on other grounds is not allowed. The Labor Code provides for the following grounds for the termination of employment agreements: Termination of an employment agreement by agreement of the parties Any employment agreement whether concluded for an indefinite term or fixed term may be terminated by agreement of the parties at any time. This procedure for terminating labor relations is widely used in practice, as it involves minimal potential risks for the employer. The labor legislation does not obligate an employer to pay any compensation to an employee; however, it is possible if provided for by the conditions of the agreement between the employee and the employer. Resignation of an employee An employee is entitled to terminate an employment agreement at his/her own initiative at any time. In this case, the employee in question must notify the employer of his/her resignation in writing, as a rule at least 2 weeks in advance. Prior to the expiration of the resignation notification period, the employee is entitled to withdraw the letter of resignation at any time. In such cases dismissal does not occur. If upon expiration of the resignation notification period the employment agreement is not terminated and the employee does not insist upon resignation, the employment agreement remains valid. 47

59 Termination of a fixed-term employment agreement A fixed-term employment agreement terminates upon expiration of the term stated therein. If upon expiration of the term of the employment agreement neither the employee nor the employer has requested termination of the labor relations, the provision regarding the term of the agreement loses effect and the agreement becomes indefinite. In a case of the termination of a fixed-term employment agreement due to the expiration of its term, the employer is obligated to notify the employee thereof in writing three calendar days prior to dismissal, otherwise the agreement will also be deemed to have been prolonged for an indefinite term. Termination of labor relations due to circumstances beyond the parties control In some cases an employment agreement is subject to termination due to circumstances beyond control of both the employer and the employee. The list of such circumstances is stipulated by the Labor Code and, in particular, includes: an employee being called up for military service; reinstatement of an employee who previously performed the duties in question; recognition that the employee in question is completely incapable of working; disqualification of an employee; an employee being sentenced to punishment by the verdict of a court, and other circumstances. Termination of an employment agreement at the initiative of the employer Dismissal on the employer s initiative always requires a certain substantiation, directly stated in the Labor Code, as well as compliance with the mandatory procedures and careful execution of all required documents. The Labor Code contains a relatively broad list of the grounds for dismissal of an employee on the employer s initiative. The most important of them are: Dismissal for reasons connected with the employee s conduct, including: repeated non-performance of employment duties for no good reason, resulting in disciplinary sanctions; a single gross breach of employment duties; presentation by the employee of falsified documents during the hiring process, and other grounds. Dismissal for reasons associated with the employee s insufficient professional qualifications. Dismissal for production reasons: liquidation of the organization or a separate subdivision thereof; staff reduction. In these cases the employees must be notified at least two months prior to dismissal, and paid a severance pay equal to the amount specified by the Labor Code. 48

60 It is prohibited, in all cases, to dismiss an employee on the employer s initiative during the employee s temporary incapacity to work or during leave, as well as to dismiss pregnant women, other than in the case of the liquidation of the organization. Should any legislative requirements be breached, the dismissal of an employee may be deemed unlawful. In such cases, the employee may be reinstated at work and the employer may be obligated to pay the employee compensation for forced absenteeism and for the emotional distress caused by the unlawful dismissal Specific Features of the Employment of Company Executives Company executives are individuals vested by virtue of law, other regulatory legal acts and/or the company foundation documents, with the right to manage the company, and in particular, to perform the functions of its single-member executive body. The term executive used in Russian legislation is of a general character, and when applied to a company of a particular type may be replaced with other terms, for example director, general director, president, chairman of the board, etc. An executive is considered to be a company employee. Correspondingly, an employment agreement shall be entered into by the executive and the company, and relations between them are regulated not only by labor legislation, but also by civil legislation and the company corporate documents. Legislation provides for the following specific features in the regulation of the employment of company executives: An executive may be employed on the basis of either an indefinite employment agreement or a fixed-term employment agreement, which is established by the foundation documents or the employment agreement. The employment agreement with an executive may stipulate a longer probation period: up to 6 months. An executive may occupy paid positions in other companies (i.e. have secondary employment) only subject to the permission of the employing company s authorized body (general meeting of participants / shareholders, board of directors, etc.). An executive bears full material liability for direct damage caused to the employer, and is obligated to compensate for any losses, including lost profit, caused to the company by his/her wrongful acts, in such cases as have been established by Russian legislation. Along with the general grounds for terminating an employment agreement with a 49

61 company executive, legislation also provides for additional grounds, for example: the authorized body of the employing company taking a decision to prematurely terminate the employment agreement with the executive. In the absence of wrongful acts (or omissions) by the executive, he/she is paid compensation as determined by the employment agreement, but not less than three times the executive s average monthly salary; bankruptcy of the employing company; other grounds agreed upon by the parties in the employment agreement. Federal law and company foundation documents may extend the specific features of employment established for a company executive to the members of the company s collective executive body, who have entered into an employment agreement with the company Financial Liability Employee s Financial Liability Financial liability of an employee is limited to the amount of direct damages incurred as a result of a wrongful act or omission by the employee. As is directly prescribed by law, an employer may not claim lost profits from an employee. Russian labor legislation distinguishes between limited and full financial liability of an employee. As a general rule, an employee who has caused losses to an employer shall be held liable within the limits of his/her average monthly salary (limited liability). Full financial liability means that an employee is obligated to compensate for all losses that he/she has caused to the employer, even if such losses significantly exceed his/ her average monthly salary. The employee shall bear full financial liability only in the cases directly stipulated by the Labor Code, in particular: malicious damage; damage caused while inebriated; damage caused as a result of an employee s criminal offence; damage caused while not fulfilling employment duties; damage caused as a result of the disclosure of a legally protected secret, including a trade secret; and other cases Employer s Financial Liability Labor Code provides for four main cases of employers financial liability: 1) Compensation for damages caused to the employee due to the illegal deprivation of the possibility to work, including: unfair dismissal, illegal transfer to another job, delays in obeying a court ruling on reinstating employment, and other cases. Compensation shall be paid at an amount equal to the employee s average salary 50

62 for the entire period of deprivation of the possibility to work. 2) Compensation for damages to the employee s property. The damage shall be compensated for in full at current market prices. 3) Monetary compensation for delaying payment of salary, leave allowances or other sums due an employee, calculated at the rate of at least 1/300th (in Moscow 1/200th) of the current Central Bank refinancing rate on the outstanding amounts for each day of delay. 4) Compensation for emotional distress caused to the employee by the employer s unjust actions, at an amount determined by the agreement between the employee and the employer, or by a court. The liability of the employer and the employee may be specified by the employment agreement or by separate written agreements. However, such contractual liability of an employer to an employee may not be lower, and an employee s liability to an employer may not be higher than that stipulated by Labor Code or other federal laws Employment of Foreign Citizens Employer s Obligations The principal conditions for the performance of labor activities by foreign citizens in Russia are established by Federal Law No. 115-FZ On Legal Status of Foreign Citizens in the Russian Federation dated July 25, The said law prescribes that the employer, who has invited a foreign citizen to work in Russia and entered into an employment agreement therewith, shall as a rule be obligated to: have permission to engage and use foreign employees, and ensure that foreign employees obtain work permits; ensure migration registration of foreign employees at their place of residence during their stay in the Russian Federation; notify the relevant state authorities of the employment of foreign citizens; fulfill any other obligations related to the observance of the regime of foreign citizens stay in Russia. Any violation of the rules of engagement and use of foreign employees in Russia shall entail administrative liability. Such liability is stipulated for both the employing company (a fine of between 250,000 and 800,000 rubles) and the employing company s executive (a fine of between 25,000 and 50,000 rubles) as well as the employee who is a foreign citizen and who has illegally worked in Russia (a fine of between 2,000 and 5,000 rubles, with or without deportation from Russia). 51

63 Permitting Documents Employers have the right to engage foreign employees provided that the employer and the employee obtain both the respective permitting documents, and an appropriate Russian visa. Depending on the status of the foreign citizen, the following documents must be obtained: Employment of highly qualified foreign specialists, i.e. foreign employees who are paid salaries of at least 2 million rubles per year, requires the obtaining of a work permit and a work visa for the specialist in question. Both documents are issued for up to 3 years. Employment of other foreign citizens is possible, provided that the employer obtains a permit to engage and use foreign employees and the employee obtains a work permit and a work visa. The said permits and the work visa are issued for a period of up to 1 year. The procedure described above does not apply to the following people; foreign citizens holding residence permits; foreign citizens employed by diplomatic missions and consular establishments of foreign countries in the Russian Federation, or by international organizations; journalists accredited in Russia; employees of foreign legal entities (manufacturers or suppliers) performing assembly works, service and guarrantee maintenance as well as follow-up services for technical equipment imported to Russia; and other categories of foreign citizens specified by Russian legislation. Employment of a foreign citizen, who has entered Russia under a visa-free regime, is permitted provided that the foreign citizen in question holds a work permit that he/she may obtain independently Migration Registration Foreign employees, who enter Russia on the basis of a visa or under a visa-free regime, are subject to migration registration at their place of stay. The employer shall, within 7 business days from the foreign employee s arrival at the place of employment, submit a special notification to the regional body of the Federal Migration Service. If the foreign employee falls within the category of highly qualified specialists, the employer shall be obligated to ensure migration registration of such an employee after 90 days from his/her entry to the territory of Russia, or after 30 days if the employee moves within the territory of Russia. If the foreign employee stays at a hotel, the hotel administration is responsible for his/her migration registration within 24 hours of the employee s arrival at the hotel. 52

64 5. Taxation 5.1 Introduction The tax reforms initiated at the end of the 1990s by the Russian government are still ongoing today. These reforms are aimed at systematizing and codifying the tax legislation, developing consistently and adopting parts of the Tax Code of the Russian Federation that regulate the collection of various taxes, as well as repealing tax laws passed in Russia at the beginning of the economic reforms of the early 1990s. Furthermore, during the course of the reforms, tax legislation is being adjusted in the context of existing economic relations. The primary goals of the ongoing tax reforms are as follows: Establishing unified taxation rules, applicable to all taxpayers; Regulating more precisely the rights and obligations of taxpayers and tax authorities; Protecting taxpayers from arbitrary decisions by authorities monitoring their activities in the area of taxation; Differentiating the powers of federal, regional, and local (municipal) taxation authorities; Increasing the investment attractiveness of the Russian Federation; Creating mechanisms for supporting strategically important sectors of the economy; Reducing the share of the shadow economy and creating more favorable conditions for companies interested in conducting legal business in the Russian Federation; Evaluating international experience in the field of taxation. In 2011, the Tax Code of the Russian Federation, the basic legal act regulating the procedure for taxation and payment of taxes and other similar payments, was significantly amended. Amendments to the Tax Code were related to both basic taxation and tax control principles, and particular issues related to certain taxes. 53

65 5.2 Main Innovations of the Tax Code of the Russian Federation Among the main innovations of Russian tax legislation, attention may be brought to the following: General Trend to Reduce Tax Rates Within the framework of the ongoing tax reforms in Russia, the rates for the following taxes have been reduced: Individual income tax. 13% is the current rate for income received by tax residents, i.e. persons staying in Russia for no less than 183 days within 12 consecutive months. The rate of tax on the income of individual residents in the form of dividends is established at 9%, and at 15% for non-residents. Turnover taxes. The burdensome and economically ineffective turnover taxes, whose rate - prior to the start of the tax system reforms - reached 4% of turnover, have now been completely repealed. As of January 1, 2003, the road use tax has been abolished. However, re-establishing road funds is currently being discussed. The sales tax was the most recent to be cancelled, on January 1, VAT. At the end of 2001, the government officials responsible for developing new tax legislation expressed ideas concerning reducing the tax rate to 16%. However, in the course of the tax reforms, the rate of VAT did not change for a long period of time and, until January 1, 2004, was 20% in most cases. As of January 1, 2004, the tax rate has been reduced to 18%. Corporate profits tax. Since 2002, the rate for most revenue has been established at 24%. Since January 1, 2009, the rate has been reduced to 20%. The rate of tax on corporate profit received in the form of dividends paid among Russian companies is 9% (0% in certain cases), and is 15% for dividends paid among Russian and foreign companies, unless international treaties stipulate otherwise. Taking into account the fact that the budget deficit has increased during the financial crisis, it is most likely not worth anticipating a further reduction in rates (for example, in VAT as discussed above) in the near future. Conversely, from 2011, it is planned to raise the fiscal burden on the wage pool by increasing the aggregate rate for social contributions. Furthermore, increasing the excise rates for certain goods is also being given serious consideration. 54

66 5.2.2 Cancellation of Tax Concessions for Particular Enterprises and Stimulation of Development of Certain Types of Activities A large number of tax concessions granted to various enterprises have been cancelled during the Russian tax reforms. In general, the cancellation of such concessions is of a positive nature, and promotes the development of healthy competition in the Russian market. At the same time, during the cancellation of most concessions, certain concessions for investors have been preserved. Moreover, at the regional level in particular, there is a general liberalization of tax rules, aimed at compensating companies for losses occurring from the cancellation of concessions. For example, the possibility of a reduction in the corporate profits tax rate is provided for certain categories of taxpayers, if established by laws of the constituent territories of the Russian Federation Tax Control The Tax Code of the Russian Federation establishes rules for exercising tax control, such as: rules for registering taxpayers and assigning them taxpayer identification numbers (INN), as well as indicating special reason codes for tax registration (KPP) for separate subdivisions; rules regulating audits conducted by tax authorities, including rules regarding the procedure for, and maximum frequency of, tax audits; rules for obtaining information on taxpayers activities, including for the purpose of adjusting transfer prices in transactions between interdependent entities and equivalent transactions. In 2011, the Tax Code of the Russian Federation was significantly amended in terms of regulating transactions between interdependent parties, controllable transactions, and pricing agreements. Additionally, the Tax Code of the Russian Federation was supplemented with a new chapter devoted to a consolidated group of taxpayers. The aforementioned amendments entered into force on January 1, 2012; mandatory pre-trial procedure for appealing decisions to hold (or to refuse to hold) a party tax liable. For the purposes of protecting taxpayers interests, the Tax Code of the Russian Federation declares the inadmissibility of wrongfully causing harm during the exercise of tax control by a tax authority. 55

67 5.2.4 Tax Violations and Penalties Compared to the previous system of penalties for tax legislation violations, the current penalty system differs in the following ways: A precise list of tax violations has been established. Legislation stipulates that penalties may be imposed only for violations included in this list. As a whole, the number of penalties has been significantly reduced. However, concerning certain violations, the number of penalties has actually been increased, which is due to the special status of the party liable (for example, banks). Tax legislation allows for an extrajudicial procedure for charging penalties. Given a delay in considering the issue of imposing penalties, tax authorities lose the right to collect the penalties from the taxpayer. All ambiguities in legislation are construed by a court as being in favor of the taxpayer. 5.3 Existing Drawbacks of the Russian Tax System It is necessary to consider separately the drawbacks of the Russian tax system. Tax administration. The Russian tax authorities are inadequately organized, and many employees often lack legal competence. This creates serious difficulties for taxpayers dealing with the tax authorities. Significant problems may arise in connection with the application of internal acts and instructions by tax authorities, e.g. orders on the establishment of socalled payroll or loss commissions, meetings of which a taxpayer has to attend. Emphasis on companies. The Russian tax system is more focused on the taxation of companies than on the taxation of individuals, as the volume of tax revenues from the individual income tax has, to date, been insignificant in comparison to the tax payments of companies. Differences from western systems. The Russian tax system differs significantly from the Western European and North American systems. First of all, it is oriented towards control over the taxation of companies rather than ultimate beneficiaries, i.e. individuals. The most conspicuous distinctions include rigid requirements with respect to formalizing documentation of all operations, and the existence of a business objective as an obligatory prerequisite for a decrease in the tax base by commercial companies. Another significant difference is that the Russian tax system uses Russian tax and accounting standards, which do not always coincide with IFRS or GAAP. However, in the course of the tax reforms, a reduction in these differences is intended, particularly in the field of consolidated tax reporting. 56

68 Tax reforms. Although the reformation of the Russian tax system is, in general, a positive factor for the development of the country s market economy, in and of itself the adoption and annulment of many regulatory acts accompanying the reforms leads to a temporary destabilization in the tax system. As a result, the practice of resolving many issues, which emerged prior to the start of the tax reforms, may undergo changes, creating uncertainty in the area of tax relations. Generally low level of legal culture. This problem is not exclusive to legal tax relations. In dealings with Russian partners and authorities, businesspeople often find that many tend to resolve issues without considering, or even completely ignoring, the existing rule of law. However, there is a current trend towards improving the level of the legal culture in Russia. Frequent amendments to legislation. Another problem for law enforcement practice is the repeated amendments to, and modification of, provisions of the Tax Code of the Russian Federation, and clarifications and acts of regulating authorities issued in accordance therewith. 5.4 General Overview of the Russian Tax System Tax and Levies Legislation The following regulatory documents regulate taxpayers and authorities rights and obligations regarding taxation: The Constitution of the Russian Federation; International agreements and treaties (in particular, agreements on the avoidance of double taxation concluded by the Russian Federation); The two-part Tax Code of the Russian Federation. The first part (hereinafter the General Part of the TC RF ) describes the general principles and rules for taxation, tax control, and the provisions on tax violations and liability. The second part of the Tax Code of the Russian Federation (hereinafter the Special Part of the TC RF ) consists of separate chapters, each regulating the procedure for paying certain Russian taxes. At the present moment, the Special Part of the TC RF is still incomplete; Various laws that regulate the procedure for levying taxes, which have not yet been included in the Special Part of the TC RF (at present, only the individual property tax is not included in the Special Part of the TC RF); Various laws that affect taxpayers rights and obligations and the procedure for determining the tax base (accounting legislation, civil legislation, legislation on investments and their protection, procedural legislation, etc.); 57

69 Various laws adopted by the constituent territories of the Russian Federation on taxation issues, within the authority established by Russian Federation legislation; Acts of executive authorities which can significantly affect the procedure for applying certain tax rules. Furthermore, the procedure for collecting taxes and levies may be affected by court practice and declarations from financial authorities (for example, the Ministry of Finance of the Russian Federation and its structural subdivision, the Federal Tax Service). It should be noted that orders and instructions of executive authorities are not always regulatory legal acts, but should be considered when a taxpayer forms financial and tax policies Principles of Taxation The main existing principles of taxation in Russia are as follows: Taxes and levies may be established only by laws adopted in the established manner. Introducing other taxes (for instance, as introduced by decree of the President of the Russian Federation, orders of ministries and departments, instructions of executive authorities of municipalities or constituent territories of the Russian Federation) is illegal. The Tax Code of the Russian Federation determines the range of regulatory acts that regulate legal tax relations. Legal tax relations are regulated only by the said acts (with the exception of relations for collecting customs payments and certain social payments). International law has priority over Russian legislation on taxes and levies, i.e. the provisions of international law apply in Russia in cases where international treaties, or conventions to which the Russian Federation is a party, specify taxation rules. The principles of the validity of tax legislation in time are established. In accordance with the General Part of the TC RF, acts that negatively affect taxpayers situations are not retroactive. On the other hand, the General Part of the TC RF applies a retroactive effect to acts releasing taxpayers from liability, or strengthening guarantees of protection of taxpayers rights. All ineradicable contradictions in legislation on taxes and levies are construed in favor of taxpayers. The rights and obligations of the bodies authorized to exercise control in the field of taxation, as well as the rights and obligations of taxpayers, are regulated. The rules for conducting tax audits are regulated. 58

70 5.4.3 The System of Taxes and Levies in the Russian Federation Since July 31, 1998, the system of taxes and levies charged in the Russian Federation has been defined by the Tax Code of the Russian Federation. The existing classification of taxes and levies divides all current taxes and levies into three groups/levels: federal taxes, taxes of the constituent territories of the Russian Federation (regional taxes), and local (municipal) taxes. The procedure for introducing a tax and establishing tax elements (rate, object of taxation, concessions, payment terms, etc.) depends on the level to which the tax pertains Federal Taxes and Levies Federal taxes are established and introduced by federal law. With respect to a number of taxes, regional authorities are vested with the right to alter federal tax rates in terms of the amounts payable to regional or local budgets. Concessions on federal taxes are established only by federal acts. With respect to certain federal taxes, regional authorities are allowed to alter the tax rates (as is the case, for instance, of the corporate profits tax) or adjust other tax elements (for instance, the amount of concessionary payments, compensations and deductions for the individual income tax). At present, federal taxes and levies include: Value added tax (VAT); Excise taxes; Individual income tax; Corporate profits tax; Tax on the extraction of minerals; Water tax; Levies for using wildlife or biological resources; State duties. From January 1, 2010 the unified social tax has been replaced by contributions to the Pension Fund of the Russian Federation, the Social Insurance Fund of the Russian Federation, the Federal Mandatory Medical Insurance Fund and regional mandatory medical insurance funds. From January 1, 2005, the collection of customs duty and customs charges is regulated by Russian Federation customs legislation. 59

71 Regional Taxes At present, regional taxes are regulated by both federal legislation and the legislation of the constituent territories of the Russian Federation. Most commonly, the basic tax elements (for example, the tax base, maximum rate, taxpayers) are established at the federal level, while exact rates, the payment procedure and the terms for paying tax are established by an act at the regional level. Generally, concessions on regional taxes must be established by regional or federal legislation. Regional taxes include: Corporate property tax Gambling tax Transportation tax Local Taxes Generally, local taxes are introduced by municipal acts. In St. Petersburg and Moscow, local taxes are introduced by acts of these cities. Certain elements of local taxes (maximum rate, base) are currently established at the federal level. The taxation procedure and tax concessions are usually established by municipal acts. Local taxes and levies include: Land tax Individual property tax 5.5 Corporate Profits Tax Object of Taxation Taxes are levied on: profits of Russian organizations (income minus expenses); profits of foreign organizations (income minus expenses) gained through a permanent establishment in Russia; income of foreign organizations from sources in the Russian Federation. 60

72 5.5.2 Tax Rates The tax is calculated at the following rates: 0% on income received by Russian organizations in the form of dividends, given fulfillment of the requirements of (1) 365 days of uninterrupted possession of no less than 50% of the contributions (shares) in the charter capital of the organizations paying the dividends, (2) if the organization paying the dividends is foreign, the state of permanent location of which is not included in the list (approved by the Ministry of Finance of the Russian Federation) of states and territories granting a concessionary tax regime and/or not providing for the disclosure and provision of information during the execution of financial operations (offshore zones), as well as on income from certain types of debt instruments. 9% on income in the form of dividends paid by Russian and foreign companies to Russian companies, as well as on income from certain types of debt instruments, in particular on income in the form of interest on mortgage-backed securities issued prior to January 1, % (unless international treaties state otherwise) on income of foreign companies from freight of vessels, aircraft, and other mobile transportation means and containers (including trailers and ancillary transport equipment), provided the activities of the foreign company do not create a permanent establishment in Russia. 15% (unless international treaties state otherwise) on income in the form of dividends paid by Russian companies to foreign companies, and on income from certain types of debt instruments. 20% (unless international treaties state otherwise) on other (except from those sources mentioned above) income of foreign companies from sources in Russia, provided that the activities of the foreign company do not create a permanent establishment in Russia. 20% on profit of Russian companies or foreign companies whose activities create a permanent establishment in Russia (2% to the federal budget and 18% to the regional budget) from September 1, Procedure for Calculating Taxable Profit As a general rule, taxable profit is calculated as the sum of the company s income minus the total expenses associated with its commercial activities. When a foreign company that has no division in Russia pays tax on income from sources in the Russian Federation, the foreign company s expenses may not be deducted from the taxable amount, with the exception of taxation of income from the sale of shares or par- 61

73 ticipatory interests in Russian companies, 50% of whose assets is comprised of real estate situated in the Russian Federation, as well as financial instruments derivative of such shares (participatory interest) other than shares recognized as publicly traded securities and real estate. For foreign companies that do have divisions in the Russian Federation, internal financial policies may determine a system for distributing income. Such a system will determine the amount of income of the division of the foreign company, and this is factored in for the purposes of profit taxation in Russia. However, in practice, the mechanism for the allocation of expenses among branches of a foreign company is questionable, and may entail discrepancies with tax authorities Income Pursuant to tax legislation of the Russian Federation, income is divided into two groups: sales income (i.e. operational income from sales); non-sales income. Sales income includes all types of income gained by a company from the sale of goods, works or services, or from the sale of other property (under Western European and Northern American classifications sales revenue). Non-sales income includes types of income which, in Western Europe and North America, are classified as nonsales income and extraordinary income. Russian legislation considers non-sales income, in particular, as income from share participation in other organizations, leasing property (if this is not the main type of activity), interest, amounts received as penalties and/or damages pursuant to court decisions, income from the gratuitous receipt of property and write-offs of company debt, as well as positive exchange rate differences and other types of income. Legislation also provides for certain types of income (earnings) which do not increase the tax base for the profits tax. Such income includes, in particular, any earnings associated with the payment of charter capital, some types of target financing, property, property gratuitously transferred between a shareholder (participant) and a subsidiary company, provided that the percentage of participation in the subsidiary company s capital is more than 50%, as well as some other incomes. The law allows both the cash basic and accrual methods of income recognition. The accrual method is most often applied, while the cash basic method is used by companies with a small turnover, or for particular types of income. A taxpayer s income may be revised by tax authorities in cases where contract prices deviate from market prices. Tax authorities may exercise this right if it is established that a transaction has been conducted between a taxpayer and interdependent parties. Moreover, the Tax Code of the Russian Federation establishes a number of trans- 62

74 actions that are equivalent to transactions with interdependent parties. In particular, such transactions include: foreign transactions with globally traded commodities; transactions, in which one of the parties is an offshore company, and intermediation transactions, which cover up transactions between interdependent parties Expenses The general principle, by which Russian legislation is guided in relation to expenses, is that any expenses that are economically feasible, aimed at generating future income and duly documented, may be deducted from taxable profit. There are expenses whose deduction from the tax base is limited, and expenses whose deduction is not allowed. As of January 1, 2009, per diem expenses are fully recognized as expenses, and not in the part established by law, as was previously the case, and, conversely, payments to members of a board of directors are no longer factored in for taxation purposes Special Rules Legislation on profits tax establishes special rules for determining the tax base with respect to certain types of income gained, in particular, in cases of: income gained through share participation; performing activities associated with the use of service sector facilities, particularly in the housing and utilities sector; entering into property trust agreements; work within a simple partnership agreement; assignment (reassignment) of rights of claim; conducting operations with securities, including state and municipal securities; conducting forward transactions; performance, by a foreign company, of activities in the Russian Federation leading to the creation of a permanent establishment; income gained by a consolidated group of taxpayers; formation of reserves for research and development. Furthermore, the Tax Code of the Russian Federation establishes particular features concerning the calculation of the tax base for banks, insurers, and participants in the securities market. 63

75 5.5.7 Features of Taxation of Foreign Companies One of the features of the taxation of foreign companies is the fact that the income of such companies may be taxed differently, depending on the type of activity carried out by the foreign company in Russia, the type of income gained, and the country of which the company is a resident. As a general rule, Russian Federation tax legislation understands the permanent establishment of a foreign company as a place where business activities are carried out in Russia on a regular basis. If a foreign company s activities create a permanent establishment in Russia, the profit gained through such a permanent establishment may be taxed in Russia according to those rules applied to Russian organizations. If a foreign company s activities do not create a permanent establishment, its income derived from Russian sources may also be taxed (see section Tax Rates above). If an agreement on the avoidance of double taxation exists between the foreign company s country of residence and the Russian Federation, certain rates may be reduced, and, in certain cases, established by agreements on the avoidance of double taxation, income is exempt from taxation in the Russian Federation. Tax on income received from sources in the Russian Federation is usually withheld by the Russian counterparty (payer) of the foreign company, and transferred directly to the budget of the Russian Federation. When planning activities of a foreign company in Russia, not only the prerequisites for formation of a permanent establishment should be taken into consideration but also the requirements for registration with tax authorities in cases established by Russian legislation. If a permanent establishment of a foreign company has actually formed while the foreign company in question is not registered with Russian tax authorities, does not pay taxes, and does not submit reports to tax authorities at the location of the permanent establishment, the following risks may arise: a Russian counterparty has to act as a tax agent under the value added tax and withhold the tax from the remuneration at the rate of 18/118, while in accordance with legislation, a foreign company is not entitled to deduct the withheld amount; a Russian counterparty has to withhold the corporate profits tax at the rate of 20%, which may be repaid provided certain documents are submitted by the foreign company; the institution of criminal proceedings against persons guilty of tax evasion in Russia, as stipulated by Article 199 of the Criminal Code of the Russian Federation; 64

76 the institution of administrative proceedings against persons who failed to discharge their obligation to register with the tax authorities, in accordance with legislation on administrative offences; the company will face tax liability in the form of a fine of 10% of the income gained by the foreign company Controllable Transactions and Transfer Prices The corporate profits tax is included in taxes, with respect to which tax authorities may control transaction prices affecting the amount of the tax to be paid. 5.6 Value Added Tax (VAT) The procedure for charging value added tax (VAT) is regulated by the Special Part of the TC RF Object of Taxation In accordance with the General Part of the TC RF, goods are considered to be any object sold or intended for sale. As a general rule, selling goods, works and services is recognized as transferring the title to the goods, carrying out the works, and rendering the services in exchange for compensation. Objects of taxation under VAT are: compensated transfer (sale) of goods, compensated performance of works and rendering of services; gratuitous transfer of goods, performed works and rendered services; in such cases the tax is calculated on the basis of market value; performance of construction and installation works for one s own use; import of goods to the customs territory of the Russian Federation. These objects are subject to taxation if the goods, works, and services are sold in the Russian Federation. Moreover, legislation establishes the rules for determining the place of sale. As a general rule, the Russian Federation is recognized as the place of sale if: the goods are in the Russian Federation and are not shipped or transported; at the moment of commencement of shipment or transport, the goods are in the Russian Federation. 65

77 With respect to services and works, rules are established for determining the place of sale depending on their connection with property located in the Russian Federation, and on the type of works carried out or services rendered. Moreover, the following operations in particular are not recognized as sales, i.e. are not charged VAT or are exempt from taxation: operations connected with the circulation of Russian or foreign currency; cash loans and operations with securities, including interest thereunder; transfers of fixed assets, intangible assets, and other property to the legal successors of a company during its reorganization; transfers of the abovementioned property to a non-commercial organization for carrying out its charter activities; transfers of property of an investment nature (contributions to charter capital, transfers of property for carrying out joint activities); sales of shares in the charter capitals of companies, units in unit trusts of cooperatives or in unit investment trusts, securities and instruments of forward transactions (futures and forward contracts and options); transfers of property during returns of investments, to the extent of the initial contribution transferred; transactions for selling land plots and/or parts thereof; transfers of property and/or property rights under concession agreements in accordance with legislation of the Russian Federation; transfers of certain social objects and fixed assets to state and municipal authorities; transfers of property bought out within the framework of privatization; performance of works (rendering of services) by state and municipal authorities, if such authorities are obligated to render such services; disposal of waste and scraps of ferrous and nonferrous metals; operations for assigning (acquiring) the rights (claims) of creditors under liabilities arising from loan agreements in cash and/or credit agreements, as well as for the borrower to perform obligations to the new creditor under the initial agreement 66

78 underlying the assignment agreement; the sale of exclusive rights to inventions, utility models, industrial designs, computer programs, databases, topographies of integrated microcircuits, production secrets (know how), as well as the rights to use said results of intellectual activities on the basis of a license agreement; lease by a lessor of premises in the Russian Federation to foreign citizens or companies accredited in the Russian Federation. Moreover, it should be noted that in certain cases, a taxpayer is entitled to waive the possibility of exemption of goods (works, services) from VAT Determining the Tax Base Sales Revenue The basis for calculating VAT is revenue from the sale of goods, works, and services. Revenue is determined on the basis of sales prices inclusive of the excise tax amount (with respect to excisable goods). For VAT purposes, rent is considered revenue from the sale of services, and is consequently subject to VAT. In the case of applying transfer prices, revenue may be adjusted for taxation purposes. All income associated with the sale of goods, works, and services, including advance payments, is included in taxable turnover subject to the particularities established by the TC RF Value of Goods Imported into the Customs Territory of the Russian Federation The tax base includes the customs value of goods, the customs duty, and the excise tax amount (with respect to excisable goods). The customs value of goods may not always coincide with the contract value, as the customs authorities are entitled to adjust the value of goods for the calculation of customs payments A Company s Own Needs The taxable turnover on goods, works, and services used for a company s own needs is determined on the basis of the prices of identical (or, in their absence, of homogeneous) goods, works, and services previously sold by the taxpayer, and, in the absence of homogeneous goods, on the basis of the market prices for such goods, works, and services, exclusive of VAT. The taxable turnover on construction works carried out for a company s own needs is determined on the basis of the actual expenditures (expenses) incurred in carrying them out. 67

79 5.6.3 Important VAT Concessions The most important VAT concessions are: Contributions of Company Participants (Founders) to the Charter Capital in Russia and Exemption from VAT in Cases of Import of Production Equipment in Accordance with the List Approved by the Government of the Russian Federation As a general rule, taxable turnover does not include goods transferred to the charter capitals of subsidiary companies, and as such transfers are not considered as sales. However, if such goods are imported, the value thereof is subject to customs VAT, i.e. VAT on imported goods. An exception to this rule is the import of production equipment, and parts thereof, having no analogues produced in the Russian Federation, which are not subject to customs VAT. Moreover, an exemption from VAT is granted only in relation to production equipment (including components and spare parts therefor) contained in the list approved by decree of the Government of the Russian Federation dated No This concession is granted not only in the case of importing the equipment as a contribution to charter capital, but also in the case of acquiring it on the basis of a supply agreement. It should be noted that when transferring property to the charter capital of a subsidiary company, the transferring organization must restore the tax sum to the amount previously deducted, or, in relation to fixed and intangible assets, to the amount proportional to the residual (book) value, exclusive of revaluation. In such cases, the tax amounts that must be restored are not included in the value of the property, intangible assets and property rights, and are subject to a tax deduction at the accepting organization. Moreover, the amount of the restored tax is stated in the documentation detailing the transfer of said property, intangible assets and property rights Export of Goods and Services Goods exported from Russia, as well as works and services associated therewith (mainly shipment, transshipment and loading, and goods processing under special customs regimes) are not taxed. There is a special procedure for confirming the right to an exemption from VAT on exported goods Tax Rates The base tax rate under VAT is established at 18%. The VAT rate applied to certain types of foodstuffs, and goods for children, is 10%. 68

80 5.6.5 Procedure for Calculating, Deducting, and Paying VAT. Output and Input VAT As a general rule, VAT to be paid to the budget is calculated as the VAT on the taxable turnover (for example, the VAT collected from purchasers of goods) less the amount of deductible VAT. In such case, the VAT collected from purchasers is called output VAT, and the deductible VAT is known as input VAТ. If input VAT exceeds output VAT, as a rule, the difference is subject to reimbursement (returned) to the taxpayer from the budget (in practice, through a judicial procedure). The main types of input VAT, subject to deduction by the purchaser, are: VAT on production expenses; VAT on acquired or constructed fixed assets. Generally, the following types of VAT are non-deductible: VAT on non-production expenses; VAT on expenses pertaining to the production of goods, the performance of works, and the rendering of services which are not charged VAT. There are exceptions to this rule; in particular, tax amounts paid to suppliers by exporting companies are deductible (i.e. reimbursed from the budget). As a rule, the tax authorities are, in practice, supportive if a taxpayer applies for a VAT deduction in the period during which goods, works, services are being sold Controllable Transactions and Transfer Prices VAT is included in the taxes, with respect to which tax authorities may control transaction prices affecting the amount of the tax to be paid. 5.7 Excise Taxes Excise tax is an indirect tax on certain types of goods. The procedure for charging excise tax is currently regulated by the Special Part of the TC RF Taxed Goods Pursuant to legislation, the following types of goods may be subject to excise taxes: ethyl alcohol from practically all types of raw materials (with the exception of cognac spirit); 69

81 products that contain alcohol and have an ethyl alcohol volume exceeding 9%, with the exception of certain types of products containing alcohol, in particular pharmaceuticals; alcoholic products (drinkable spirit, vodka, liqueurs and spirits, brandies, wine, beer, beer-based beverages, and other beverages with an ethyl alcohol volume exceeding 1.5%); beer; tobacco products; automobile and straight run gasoline; diesel fuel; motor oils for diesel, carburetor, and injector engines; light automobiles and motorcycles having an engine power exceeding kw (150 horsepower) Excise Rates Excise rates are established by the Tax Code of the Russian Federation. There are two types of rates ad valorem and fixed (or specific rates). The ad valorem rate is a certain percentage of the price of the excisable products. The fixed rate is established in a certain amount per unit of product (weight, volume, quantity). Excise rates are established separately for each type of taxable product. Below is a list of rates applied to certain excisable products. 70

82 Table No. 1 Excise Rates PRODUCT RATE From January 1 to June 30, 2012 inclusive From July 1 to December 31, 2012 inclusive From January 1 to December 31, 2013 inclusive 0 rubles per liter of absolute ethyl alcohol contained in the excisable goods 0 rubles per liter of absolute ethyl alcohol contained in the excisable goods 320 rubles per liter of absolute ethyl alcohol contained in the excisable goods 1000 rubles per kilogram From January 1 to December 31, 2014 inclusive 0 rubles per liter of absolute ethyl alcohol contained in the excisable goods 0 rubles per liter of absolute ethyl alcohol contained in the excisable goods 400 rubles per liter of absolute ethyl alcohol contained in the excisable goods 1500 rubles per kilogram (1) Perfumes and cosmetics containing alcohol, in a metal aerosol package 0 rubles per liter of absolute ethyl alcohol contained in the excisable goods 0 rubles per liter of absolute ethyl alcohol contained in the excisable goods 230 rubles per liter of absolute ethyl alcohol contained in the excisable goods 610 rubles per kilogram 0 rubles per liter of absolute ethyl alcohol contained in the excisable goods 0 rubles per liter of absolute ethyl alcohol contained in the excisable goods 270 rubles per liter of absolute ethyl alcohol contained in the excisable goods 680 rubles per kilogram (2) Household chemical products containing alcohol in a metal aerosol package (3) Products containing alcohol, not included in (1) and (2) Pipe tobacco, smoking tobacco, chewable tobacco, naswar, snuff tobacco, narghile tobacco (except tobacco used as a raw material for other tobacco products) Cigars 36 rubles per piece 530 rubles for 1,000 pieces 360 rubles for 1,000 pieces + 7.5% of the estimated value calculated on the basis of the maximum retail price, but no less than 460 rubles for 1,000 pieces 40 rubles per piece 590 rubles for 1,000 pieces 390 rubles for 1,000 pieces + 7.5% of the estimated value calculated on the basis of the maximum retail price, but no less than 510 rubles for 1,000 pieces 58 rubles per piece 870 rubles for 1,000 pieces 550 rubles for 1,000 pieces + 8% of the estimated value calculated on the basis of the maximum retail price, but no less than 730 rubles for 1,000 pieces 85 rubles per piece 1280 rubles for 1,000 pieces 800 rubles for 1,000 pieces + 8.5% of the estimated value calculated on the basis of the maximum retail price, but no less than 1,040 rubles for 1,000 pieces Cigarillos (cigaritas), bidi, kretek Cigarettes, mouthpiece cigarettes 71

83 PRODUCT Light automobiles with an engine power up to 67.5 kw (90 HP), inclusive Light automobiles with an engine power from 67.5 kw (90 HP) up to kw (150 HP), inclusive Light automobiles with an engine power from kw (150 HP), motorcycles with engine power from kw (150 HP) Automobile gasoline: Inconsistent with class 3, class 4, or class 5 Class 3 Class 4 Class 5 Diesel fuel: Inconsistent with class 3, class 4, or class 5 Class 3 Class 4 Class 5 Motor oil for diesel and/or carburetor (injector) engines Straight run gasoline RATE From January 1 to June 30, 2012 inclusive 0 rubles per 0.75 kw (1 HP) 29 rubles per 0.75 kw (1 HP) 285 rubles per 0.75 kw (1 HP) 7725 rubles per ton 7382 rubles per ton 6822 rubles per ton 6822 rubles per ton 4098 rubles per ton 3814 rubles per ton 3562 rubles per ton 3562 rubles per ton 6072 rubles per ton 7824 rubles per ton From July 1 to December 31, 2012 inclusive 0 rubles per 0.75 kw (1 HP) 29 rubles per 0.75 kw (1 HP) 285 rubles per 0.75 kw (1 HP) 8225 rubles per ton 7882 rubles per ton 6822 rubles per ton 5143 rubles per ton 4300 rubles per ton 4300 rubles per ton 3562 rubles per ton 2962 rubles per ton 6072 rubles per ton 7824 rubles per ton From January 1 to December 31, 2013 inclusive 0 rubles per 0.75 kw (1 HP) 31 rubles per 0.75 kw (1 HP) 302 rubles per 0.75 kw (1 HP) 10,100 rubles per ton 9750 rubles per ton 8560 rubles per ton 5143 rubles per ton 5860 rubles per ton 5860 rubles per ton 4934 rubles per ton 4334 rubles per ton 7509 rubles per ton 9617 rubles per ton From January 1 to December 31, 2014 inclusive 0 rubles per 0.75 kw (1 HP) 34 rubles per 0.75 kw (1 HP) 332 rubles per 0.75 kw (1 HP) 11,110 rubles per ton 10,725 rubles per ton 9416 rubles per ton 5657 rubles per ton 6446 rubles per ton 6446 rubles per ton 5427 rubles per ton 4767 rubles per ton 8260 rubles per ton 10,579 rubles per ton The gasoline and diesel fuel classes are determined in accordance with the annexes to the technical regulations of the Customs Union On Requirements for Automobile 72

84 and Aviation Gasoline, Diesel and Marine Fuel, Fuel for Reactive Engines and Boiler Oil (CU TR 013/2011). From January 1, 2012, to June 30, 2012, inclusive, ethyl alcohol made from all types of raw materials, cognac spirit and alcoholic products will be taxed at the following rates: PRODUCT Ethyl alcohol from all types of raw materials, cognac spirit: sold to companies producing perfumes and cosmetics containing alcohol in a metal aerosol package and (or) household chemical products containing alcohol in a metal aerosol package, and companies making advance excise payments (with the exception of ethyl alcohol and cognac spirit imported to the Russian Federation) and (or) transferred when conducting operations recognized as excisable in accordance with Subclause 22 of Clause 1 Article 182 of the TC RF, and (or) sold (or transferred by manufacturers within one company) for the production of goods not recognized as excisable in accordance with Sub-clause 2 of Clause 1 Article 181 of the TC RF sold to companies not making advance excise payments (including those imported to the Russian Federation) and (or) transferred within one company when a taxpayer conducts operations recognized as excisable, with the exception of operations stipulated by Sub-clause of Clause 1 Article 182 of the RF TC as well as ethyl alcohol and (or) cognac spirit sold (or transferred by manufacturers within one company) for the production of goods not recognized as excisable in accordance with Sub-clause 2 of Clause 1 Article 181 of the TC RF, and ethyl alcohol sold to companies producing perfumes and cosmetics containing alcohol in a metal aerosol package and (or) household chemical products containing alcohol in a metal aerosol package Alcoholic products with an ethyl alcohol volume exceeding 9%, including beer-based beverages with ethyl alcohol added (with the exception of beer, natural wines, including champagne, sparkling, carbonated, effervescent wines, natural beverages with an ethyl alcohol volume not exceeding 6% of the amount of finished products made from wine materials and produced without ethyl alcohol added) Alcoholic products with an ethyl alcohol volume up to 9%, inclusive, including beer-based beverages with ethyl alcohol added (with the exception of beer, natural wines, including champagne, sparkling, carbonated, effervescent wines, natural beverages with an ethyl alcohol volume not exceeding 6% of the amount of finished products made from wine materials produced without ethyl alcohol added) RATE From January 1 to June 30, 2012, inclusive 0 rubles per liter of absolute ethyl alcohol contained in the excisable goods 37 rubles per liter of absolute ethyl alcohol contained in the excisable goods 254 rubles per liter of absolute ethyl alcohol contained in the excisable goods 230 rubles per liter of absolute ethyl alcohol contained in the excisable goods 73

85 PRODUCT Natural wines (with the exception of champagne, sparkling, carbonated, effervescent wines), natural beverages with an ethyl alcohol volume not exceeding 6% of the amount of finished products made from wine materials produced without ethyl alcohol added Champagne, sparkling, carbonated, and effervescent wines Beer with a normal (standard) ethyl alcohol volume up to 0.5%, inclusive Beer with a normal (standard) ethyl alcohol volume exceeding 0.5% and up to 8.6% inclusive, as well as beer-based beverages without ethyl alcohol added Beer with a normal (standard) ethyl alcohol volume exceeding 8.6% RATE From January 1 to June 30, 2012, inclusive 6 rubles per liter 22 rubles per liter 0 rubles per liter 12 rubles per liter 21 rubles per liter From July 1, 2012 to December 31, 2014, inclusive, ethyl alcohol, as well as alcoholic products, will be taxed at the following rates: PRODUCT RATE From July 1 to December 31, 2012, inclusive From January 1 to December 31, 2013, inclusive From January 1 to December 31, 2014, inclusive Ethyl alcohol produced from food or non-food raw materials, including denatured ethyl alcohol, crude alcohol, wine, grape, fruit, cognac, calvados, whiskey distillate sold to companies producing perfumes and cosmetics containing alcohol in a metal aerosol package and (or) household chemical products containing alcohol in a metal aerosol package, and companies making advance excise payments (with the exception of ethyl alcohol and cognac spirit imported to Russian Federation) and (or) transferred when conducting operations recognized as excisable in accordance with Sub-clause 22 of Clause 1 Article 182 of the TC RF, and (or) sold (or transferred by manufacturers within one company) for the production of goods not recognized as excisable in accordance with Sub-clause 2 of Clause 1 Article 181 of the TC RF 0 rubles per liter of absolute ethyl alcohol contained in the excisable goods 0 rubles per liter of absolute ethyl alcohol contained in the excisable goods 0 rubles per liter of absolute ethyl alcohol contained in the excisable goods 74

86 PRODUCT RATE From July 1 to December 31, 2012, inclusive From January 1 to December 31, 2013, inclusive From January 1 to December 31, 2014, inclusive sold to companies not making advance excise payments (including those imported to the Russian Federation) and (or) transferred within one company when a taxpayer conducts operations recognized as excisable, with the exception of operations stipulated by Sub-clause of Clause 1 Article 182 of the RF TC as well as ethyl alcohol and (or) cognac spirit sold (or transferred by manufactures within one company) for the production of goods not recognized as excisable in accordance with Sub-clause 2 Clause 1 Article 181 of the TC RF and ethyl alcohol sold to companies producing perfumes and cosmetics containing alcohol in metal aerosol package and (or) household chemical products containing alcohol in a metal aerosol package Alcoholic products with an ethyl alcohol volume exceeding 9% (with the exception of beer, wines, fruit wines, sparkling wines (champagne), wine drinks produced without the addition of rectified ethyl alcohol made of food raw materials and (or) fortified grape or other fruit must and (or) wine distillate and (or) fruit distillate) 44 rubles per liter of absolute ethyl alcohol contained in the excisable goods 59 rubles per liter of absolute ethyl alcohol contained in the excisable goods 74 rubles per liter of absolute ethyl alcohol contained in the excisable goods 300 rubles per liter of absolute ethyl alcohol contained in the excisable goods 400 rubles per liter of absolute ethyl alcohol contained in the excisable goods 320 rubles per liter of absolute ethyl alcohol contained in the excisable goods 7 rubles per liter 500 rubles per liter of absolute ethyl alcohol contained in the excisable goods Alcoholic products with an ethyl alcohol volume up to 9%, inclusive, (with the exception of beer, beer-based beverages, wines, fruit wines, sparkling wines (champagne), wine drinks produced without the addition of rectified ethyl alcohol made of food raw materials and (or) fortified grape or other fruit must and (or) wine distillate and (or) fruit distillate) Wines, fruit wines (with the exception of sparkling wines (champagne), wine drinks produced without the addition of rectified ethyl alcohol made of food raw materials and (or) fortified grape or other fruit must and (or) wine distillate and (or) fruit distillate) Sparkling wines (champagne) 270 rubles per liter of absolute ethyl alcohol contained in the excisable goods 400 rubles per liter of absolute ethyl alcohol contained in the excisable goods 6 rubles per liter 8 rubles per liter 22 rubles per liter 0 rubles per liter 24 rubles per liter 0 rubles per liter 25 rubles per liter 0 rubles per liter Beer with a normal (standard) ethyl alcohol volume up to 0.5%, inclusive 75

87 PRODUCT RATE From July 1 to December 31, 2012, inclusive From January 1 to December 31, 2013, inclusive From January 1 to December 31, 2014, inclusive Beer with a normal (standard) ethyl alcohol volume exceeding 0.5% and up to 8.6% inclusive, as well as beer-based beverages Beer with a normal (standard) ethyl alcohol volume exceeding 8.6% 12 rubles per liter 15 rubles per liter 18 rubles per liter 21 rubles per liter 26 rubles per liter 31 rubles per liter Procedure and Terms for Payment of Excise Taxes As a general rules, excise taxes are paid upon the sale (transfer) by taxpayers of excisable goods produced thereby, no later than the 25th day of the month following the reporting month. Companies obligated to make advance excise payments shall make such payments no later than the 15th day of the current reporting month. Excise taxes on excisable goods imported to the Russian Federation are paid subject to the provisions of the Customs Union of Russia, Belarus, and Kazakhstan, and to legislation of the Russian Federation on customs activities, in particular, Federal Law No. 311-FZ On Customs Regulation in the Russian Federation dated November 27, Controllable Transactions and Transfer Prices Excise taxes are not included in the taxes, with respect to which tax authorities may control transaction prices affecting the amount of the tax to be paid. However, when assessing the tax base, the taxation rules with respect to controllable transactions and transfer prices should be taken into account. 5.8 Transportation Tax The transportation tax, as distinguished from the tax on owners of transportation means charged prior to January 1, 2003, is not federal but regional. Payers of the transportation tax are generally entities to which, in accordance with legislation of the Russian Federation, registered transportation means are acknowledged as an object of taxation. Objects of the transportation tax are automobiles, motorcycles, scooters, buses and other self-propelled vehicles and machinery on pneumatic and crawler tracks, airplanes, helicopters, motor vessels, yachts, sailboats, barges, snowmobiles, motor sledges, motor boats, jet skis, non self-propelled (towed vessels) and other water and air means of transportation, duly registered in accordance with legislation of the Russian Federation. 76

88 The tax rates depend on the power of the means of transportation, and are presented in Table No. 2, providing summarized information on the main taxes and levies. The transportation tax is paid at the location of the transportation means. The detailed procedure for paying this tax is regulated by legislation of the constituent territories of the Russian Federation. 5.9 Corporate Property Tax On January 1, 2004, a new chapter of the Special Part of the Tax Code of the Russian Federation, entitled Corporate Property Tax, came into force and replaced the then existing Law of the Russian Federation On Tax on Property of Enterprises No dated December 13, The corporate property tax is introduced by laws of constituent territories of the Russian Federation on the basis of the TC RF. When establishing the tax, legislative (representative) bodies of constituent territories of the Russian Federation determine the tax rate up to 2.2%, and the procedure and deadline for payment thereof. Laws of constituent territories of the Russian Federation may also provide for tax concessions and grounds for application thereof by taxpayers Object of Taxation For Russian organizations, movable and immovable property (including property transferred for temporary possession, use, administration or trust management, contributed to joint activities, or received under a concession agreement) is an object of taxation, recorded on the balance sheet as fixed assets in accordance with Russian accounting procedures. For foreign organizations performing activities in Russia through permanent establishments, movable and immovable property is an object of taxation, classified as fixed assets in accordance with Russian accounting procedures, as well as property received under a concession agreement For foreign organizations not performing activities in Russia, immovable property located in the Russian Federation and belonging to the said foreign organizations by title is an object of taxation, as well as immovable property received under a concession agreement. In particular, land plots and other natural items (water bodies and other natural resources) are not recognized as objects of taxation Tax Base The tax base is determined on the basis of the average annual book value of the tax- 77

89 able property. For depreciable property, the residual value of such property (the initial value minus accrued depreciation) is subject to taxation. The tax base with respect to real estate of foreign companies not performing activities in Russia through permanent establishments, as well as the real estate of foreign companies not related to the activities of such companies performed in Russia through permanent establishments, is the assessed value of such real estate in accordance with the information possessed by the Russian technical inventory authorities Tax Rate The maximum tax rate may not exceed 2.2%. The particular tax rate is established by legislation of the constituent territories of the Russian Federation Concessions on Property Tax In accordance with the Tax Code of the Russian Federation, when establishing the corporate property tax, laws of the constituent territories of the Russian Federation may provide for tax concessions and the grounds for utilizing them. Therefore, laws of many constituent territories of the federation stipulate tax concessions in relation to property acquired or created for implementing investment projects, in the form of a reduced tax rate or a full tax exemption for a certain period (usually for the investment project s payback period, but not longer than the maximum payback period determined by regional legislation) Payment Procedure and Terms The tax is calculated and paid quarterly, based on the average value of the property for the quarter. Legislation stipulates advance payments. Taxpayers are obligated to submit tax calculations for advance payments not later than 30 days after the respective quarter has ended. A property tax declaration is submitted to the tax authorities by March 30 of the year following the expired tax period Customs Duty Since 2003, common economic and customs space is being actively created within the framework of the integration process in the territory of the former USSR. Based on the Treaty on the Creation of the Common Customs Territory and Establishment of the Customs Union dated October 6, 2007, Treaty on the Commission of the Customs Union dated October 6, 2007, Russia, Belarus, and Kazakhstan adopted a number of international acts regulating activities under the auspices of the customs union. On November 29, 2009, the Uniform Customs Tariff of the Customs Union of the Republic of Belarus, the Republic of Kazakhstan and the Russian Federation (UCT) was approved by Decision of the EurAsEC Interstate Council and Decision of the Commission of the Customs Union. The UCT is a document establishing the rates 78

90 of import customs duties in the territory of the customs union. On January 2, 2012 a new version of the Uniform Customs Tariff of the customs union of Russia, Belarus, and Kazakhstan took effect Assessment base The base for the assessment of customs duties, depending on the type of goods and applicable rates, is the customs value of the goods and (or) their physical characteristics in natural units (amount, weight including a primary package that is inseparable from the goods until the consumption thereof, and in which the goods are sold at retail, volume, or other characteristics). The customs value may differ from the contractual value of goods if the controlling authorities adjust the customs value, provided that there are grounds for such an adjustment Customs Duty Rates The rates of customs duties on imported goods are established by the Government of the Russian Federation in accordance with the UCT. At present, the UCT establishes rates for 97 groups of goods. The classification of goods established in the UCT is similar to the classification used by most countries of the CIS and the EU. Customs duty rates may be: 1) ad valorem, i.e. established as a percentage of the customs value of the dutiable goods; 2) specific, i.e. established dependent on physical characteristics in natural units (amount, weight, volume or other characteristics); 3) combined, i.e. combining features of both the ad valorem and specific rates. The rates of import customs duty established by the UCT are applicable to imported goods. However, certain types of raw materials exported from the Russian Federation are also subject to customs duties. The rates of export customs duty are determined by the Government of the Russian Federation Concessions for Investors At present, the main concession frequently utilized by foreign investors is the concession in the form of an exemption from customs duties on goods imported as a foreign founder s/participant s contribution to the charter capital of a Russian legal entity with foreign investments. 79

91 This concession is granted if such goods satisfy the following conditions: they are not excisable; they are to be included into the fixed production assets; they are imported during the period of formation of the charter capital established in the foundation documents of the legal entity. It should be noted that in the case of an aggressive approach, a customs authority may require guarantee security for the customs payments. In addition to the said concession, customs union legislation offers other types of concessions, the most significant of which is an exemption from import customs duty on technological equipment, components and spare parts therefor, as well as on raw materials and materials imported exclusively for use in the territory of the member states of the customs union and for the implementation of an investment project, the list of which shall be approved by the Commission of the Customs Union, and concessions with respect to certain types of goods (e.g. goods connected with aviation and the production of aircraft, automobile components imported by enterprises producing motor vehicles with application of the term industrial assembly (code 8703 in accordance with the Commodity Nomenclature of Foreign Economic Activities of the Customs Union) and complying with certain criteria) Payment Procedure and Terms Customs duties are paid during the customs clearance of the goods, unless a customs procedure, which grants either a deferment or payment in installments, is applicable Social Payments General Description of the Social Payments System The social security system of the Russian Federation is built on the activities of social funds, payments to which (via the federal budget) are mainly made by employers based on the amounts of employees salaries and other taxable payments. It is necessary to mention that at the present moment, the amount of social benefits received by an employee from the said funds essentially does not depend on the amount paid by the employer to such social funds. Correspondingly, the said payments do not provide employees with a sufficient amount of social benefits, such as healthcare, pensions, and social security, and therefore are of a sort of fiscal nature. This is why neither employers nor employees are particularly interested in making such social payments. However, in connection with the pension 80

92 reforms currently being carried out in the Russian Federation, the state is attempting to convert the pension system to an accumulative basis. It is supposed that hereafter pensions will be paid not only in the form of the payment established by legislation (the insurance portion of pension) but also the accumulated sum due to the former employee (the accumulative portion of pension) Changes in the Social Payments System The social payments system has recently undergone significant changes. On January 1, 2001, three previously existing levies (to the Pension Fund, the Mandatory Medical Insurance Fund and the Social Insurance Fund), whose payment procedures were regulated by various laws and subordinate acts, were replaced by a unified social tax, established by the Tax Code of the Russian Federation. The unified social tax is also approaching its end, as a resolution has been passed to reject the tax nature of the social payments and to remove them from regulation by the Tax Code of the Russian Federation. As of January 1, 2010, a system for making insurance contributions to the various funds was re-introduced. Moreover, relations connected with the calculation and payment of insurance contributions are regulated by separate federal laws New Procedure for Paying Insurance Contributions (introduced on January 1, 2010) From 2010 the unified social tax will be replaced by insurance contributions for particular types of social insurance, including: insurance contributions for mandatory pension insurance to the Pension Fund of the Russian Federation; insurance contributions for mandatory social insurance for temporary incapacity to work, and in connection with maternity, to the Social Insurance Fund of the Russian Federation; insurance contributions for mandatory medical insurance to the Federal Mandatory Medical Insurance Fund and regional mandatory medical insurance funds. Payers of the insurance contributions are insured in accordance with federal laws on the particular types of mandatory social insurance, which includes entities making payments and other remuneration to individuals, as well as individual entrepreneurs, advocates and notaries in private practice. Legislation establishes a number of privileged categories of insured individuals, for the rates of insurance contributions are lower than those established in accordance with the general rule. A positive feature is, for example, the introduction of an exemption from the obligation 81

93 to make insurance contributions to the Pension Fund of Russia on payments and other remuneration under employment agreements, in favor of foreign citizens temporarily residing in the Russian Federation, provided that such employment agreements are concluded for less than 6 months or with highly qualified specialists. In accordance with the general rule, these individuals are foreign citizens having work experience, skills or achievements in a specific field of activities, and the terms and conditions of employment in the Russian Federation stipulate payment of a salary (remuneration) of at least 2,000,000 rubles per year (365 calendar days). The base for accruing insurance contributions is determined in relation to each employee from the start of the year on an accrual basis, but may not exceed 415, 000 rubles. Insurance contributions will not be collected on payment sums exceeding this amount. Moreover, the maximum base amount of 415, 000 is subject to annual indexation according to growth in the average wage in Russia. In the following tariffs will apply: to the PFR - 26%, to the SIF RF 2.9%, to the FFMMI 5.1%. The said tariffs shall apply to the contribution assessment base not exceeding 512, 000 rubles in 2012 and 573, 000 rubles in 2013, while the amounts in excess of these sums will be subject to an insurance contribution payable to the Pension Fund of Russia at a rate of 10%. Therefore, starting from 2012, the fiscal burden related to the payment of insurance contributions will constitute up to 30% of the payroll. Furthermore, the Pension Fund of the Russian Federation and the Social Insurance Fund of the Russian Federation and their regional bodies are vested with functions for exercising control over the payment of insurance contributions. The regional bodies will have to jointly conduct scheduled field audits related to the payment of insurance contributions Contributions for Insurance Against Industrial Accidents and Occupational Diseases The object of taxation in question is the amount of payments to employees, as well as payments to individuals, under civil agreements (for example, under a works contract). The contribution rate is determined on the basis of the classification of various enterprises by professional risk, which depends on the branch of industry. Currently, 22 classes of professional risk are established. Different rates are established for different categories of enterprises, and currently vary from 0.2% to 8.5%, accrued on amounts of wages paid, and other payments to employees. As a rule, the contribution is paid monthly, no later than the date of receipt in the bank of the funds for wage payments, or during the transfer of the funds to the employees bank accounts. 82

94 5.12 Individual Income Tax Despite legislation stipulating that taxpayers of individual income tax are not companies but rather employees, companies are, nonetheless, obliged to act as tax agents for the calculating and withholding of tax from the income paid (or otherwise provided) to an individual, and for transferring the tax to the authorities. The established amount of, and the procedure for, charging income tax may have a significant influence on the activities of the employing company, particularly with regard to planning the level of employees wages, which should be competitive in the Russian market. In this context, this brochure briefly illustrates the main issues related to charging Russian individual income tax Object of Taxation The object of taxation is the income of an individual resident of the Russian Federation, from sources both in the Russian Federation and abroad. For nonresidents of the Russian Federation, the only object of taxation is income from sources in the Russian Federation Tax Rate The income tax rate for tax residents of the Russian Federation is 13%. For nonresidents, the tax rate on income from sources in the Russian Federation is 30%. There are special rates for certain types of income such as cash prizes, insurance compensation, etc. A different (lower) income tax rate may be applied if such a rate is provided for by a respective agreement on the avoidance of double taxation, or by another international agreement to which the Russian Federation is a party Tax Collection Procedure When taxable income is paid to employees by their employing enterprise, the employer is usually obligated to withhold the tax from the payments made to the employees, and transfer the withheld tax to the authorities on the date of payment of the income. Legislation may provide for another procedure for paying taxes, for example, an independent declaration and payment of tax by individuals in a number of cases Foreign Citizens Obligation to Pay the Tax As a general rule, foreign citizens staying in the Russian Federation for 183 days or more within 12 consecutive months are considered tax residents of the Russian Federation and are obligated to pay the Russian individual income tax on all global income (including income received from outside the Russian Federation), unless a respective agreement on the avoidance of double taxation specifies otherwise. In particular, on the basis of an international agreement, a foreign citizen may be fully or partially released from the obligation to pay tax on income earned in the country of his/her residency. 83

95 5.13 Summary of Russian Taxes The table below provides general information on the taxation of legal entities. It is for informational purposes only, and should not be used as the basis for any specific managerial decisions. Table No. 3. Summary of the Main Taxes Paid by Legal Entities in the Russian Federation Tax / Tax Level VAT Federal Tax Corporate Profits Tax Federal Tax Corporate Property Tax Regional Tax Transportation Tax Regional Tax Current Tax Rates 18% - for most goods, works, and services; 10% - for certain foodstuffs, children s goods, periodic print publications, and domestic and foreign produced medical goods; 0% - in relation to exported goods, works (services) directly associated with the shipment or transport of goods placed under the customs regime of international customs transit, and certain other goods (works, services). 0% - on income of Russian organizations in the form of dividends, given compliance with several legislatively established conditions; 9% - on income in the form of dividends paid by Russian and foreign companies to Russian companies; 15% (unless otherwise provided for by international agreements) - on income in the form of dividends paid by Russian companies to foreign companies; 10% (unless otherwise provided for by international agreements) - on income of foreign companies from freight of vessels, planes, other mobile transportation means and containers, provided that the foreign company s activities do not create a permanent establishment in Russia; 20% (unless international agreements provide for another rate) - on other income (aside from those mentioned above) of foreign companies from sources in Russia, provided that the foreign company s activities do not create a permanent establishment in Russia; 15% - on income from state and municipal securities (there are exceptions); 20% - on profit of Russian companies or foreign companies whose activities create a permanent establishment in Russia (2% to the federal budget and 18% to the regional budget) as of September 1, Not more than 2.2% of the residual value of the taxable property, according to accounting data. From 1 to 50 rubles per horsepower, depending on the engine power, or 200 rubles per vehicle for other air and water means of transportation (having no engine). Laws of the constituent territories of the Russian Federation may raise or reduce the specified rates, but not by more than 10 times. 84

96 Tax / Tax Level Contributions for insurance against industrial accidents and occupational diseases Federal Tax Insurance contributions to the Pension Fund, Social Insurance Fund, Federal Mandatory Medical Insurance Fund of the Russian Federation Current Tax Rates From 0.2% to 8.5% of the payroll and payments under civil agreements. In : Up to 30% of an amount not exceeding 512, 000 rubles in 2012 and 573, 000 rubles in % of an amount in excess of 512, 000 rubles in 2012 and 573, 000 rubles in

97 6. State Controlling Authorities 6.1 Authorities that Carry Out State Registrations or Accreditations of Legal Entities, Their Representative Offices and Branches Activities of foreign investors in the Russian Federation may be carried out, among other ways, by establishing legal entities, as well as by opening branches and representative offices. Within the framework of the procedure for establishing a legal entity, its state registration in the Unified State Register of Legal Entities is carried out. The Federal Tax Service and its territorial subdivisions are vested with the authority to carry out state registrations of legal entities, and maintain the Unified State Register of Legal Entities. As a rule, the accreditation of representative offices and branches of foreign legal entities opened in the Russian Federation is carried out by the State Registration Chamber, established at the Ministry of Justice of the Russian Federation. The State Registration Chamber is also vested with the authority to maintain the Consolidated State Register of Representative Offices of Foreign Companies Accredited in the Territory of the Russian Federation, and the State Register of Branches of Foreign Legal Entities Accredited in the Territory of the Russian Federation. Issues related to the establishment of new legal entities, their representative offices and branches in the Russian Federation, and to the extent to which they influence foreign investors interests (including issues concerning interactions with the state authorities that carry out state registrations of legal entities or accreditations of branches and representative offices), are reviewed in greater detail in Section 2 Corporate Law. 6.2 Currency Regulation Authorities, Currency Control Authorities and Agents The Federal Law On Currency Regulation and Currency Control No. 173-FZ dated December 10, 2003, provides for three types of subjects which operate in the field of currency regulation and control: currency regulation authorities, currency control authorities, currency control agents. 86

98 The currency regulation authorities are: The Central Bank of the Russian Federation; The Government of the Russian Federation. The currency regulation authorities are entitled to issue regulatory legal acts concerning currency regulation issues in the cases stipulated by the Federal Law On Currency Regulation and Currency Control. The currency control authorities are: The Central Bank of the Russian Federation; The Federal Service for Financial and Budget Supervision (Rosfinnadzor). The currency control authorities may issue currency control acts concerning issues which fall within their authority, and to the extent stipulated by legislation of the Russian Federation and acts issued by the currency regulation authorities. The Central Bank of the Russian Federation stipulates uniform accounting and reporting forms with respect to currency operations, the procedure and timelines for submission thereof. The currency control agents are: authorized commercial banks subordinate to the Central Bank of the Russian Federation, the state corporation Bank razvitiya i vneshneeconomicheskoy deyatelnosti (Vnesheconombank), professional participants in the securities market which are not authorized banks, including register keepers (registrars), subordinate to the Federal Service for Financial Markets, customs authorities, tax authorities. Currency control agents exercise control over currency operations, the opening and maintenance of the accounts of Russian and foreign entities, and are also entitled to request and obtain documents related to currency operations. Russian currency regulation and control legislation is rather strict. Some offences may result in the application of penalties equal to the total sum of the respective currency operation. Special attention should be paid to specific features of Russian currency regulation 87

99 and control legislation, such as the following: a requirement regarding the repatriation of currency proceeds and the return of prepayment in a case where it is impossible to deliver goods when due, in accordance with the respective contract; mandatory provisions requiring the issue of transaction passports under foreign trade contracts for an amount exceeding the equivalent of USD 50,000; a requirement regarding the strict submission to the bank of supporting documents and reports, in due course and as stipulated by legislation. To avoid the risk of having to pay penalties, it is recommended that an analysis is carried out in advance in order to establish which documents have to be issued and then submitted to currency control agents, and within which timelines, when performing foreign economic activities. 6.3 Russian Federation Antimonopoly Authorities and Antimonopoly Regulation Antimonopoly Legislation of the Russian Federation The basis of antimonopoly legislation of the Russian Federation is the Federal Law On Protection of Competition No. 135-FZ dated July 26, 2006 (hereinafter the Law on Protection of Competition ). This Federal Law is designed to protect competition and suppress monopolistic activities of Russian and foreign business entities, as well as to prevent the restriction or elimination of competition by state and local authorities. Apart from the Law on Protection of Competition, the Federal Law On Natural Monopolies No. 147-FZ dated August 17, 1995, which regulates relations between natural monopolies, consumers, and executive authorities, should also be mentioned. Moreover, interaction between business entities and antimonopoly authorities are regulated by bylaws. In particular, such bylaws include the Decree of the Government of the Russian Federation On Approval of the Rules for Forming and Maintaining the Register of Business Entities Which Have a Greater than 35% Share of the Market for a Particular Product, or Which Occupy a Dominant Position in the Market for a Particular Product, If, in the Market in Question, Federal Laws Establish Instances in which the Position of Business Entities is Recognized as Dominant No. 896 dated December 19, 2007, regulating the procedure for including business entities in and removing them from the Register. Inclusion of a business entity in the Register affects its interests in terms of correctly determining the market share of the given entity. Furthermore, the fact of a business entity s inclusion in the Register constitutes grounds for subjecting it to the authorization-based procedure for the acquisition of shares and assets of other business entities. 88

100 6.3.2 Antimonopoly Authorities of the Russian Federation The Federal Antimonopoly Service (hereinafter the FAS ) is the state authority responsible for implementing antimonopoly policy. The FAS has territorial departments and is entitled by Russian Federation legislation to issue, within its authority, regulatory legal acts. The FAS functions on the basis of the Regulation approved by the Decree of the Government of the Russian Federation No. 331 dated June 30, 2004, as well as on the basis of the Decree of the Government of the Russian Federation Issues of the Federal Antimonopoly Service No. 189 dated April 7, The FAS s main functions are: to control the observance of antimonopoly legislation, including in the fields of electric energy, use of land, subsoil, water and other natural resources; to monitor and control the observance of legislation on competition in markets for goods and the market for financial services; to monitor and control the observance of legislation on natural monopolies; to monitor and control the observance of legislation on advertising; to exercise control in the area of placing orders for the supply of goods, the performance of works, the rendering of services for federal state needs (with certain exceptions) and the needs of the constituent territories of the Russian Federation and municipal needs; to control foreign investments in business entities of strategic importance for national defense and security. Detailed information on the FAS s activities, in both the Russian and English languages, can be found on the FAS s official website at Main Provisions of Antimonopoly Legislation of the Russian Federation Prohibition of Monopolistic Activities The Law on Protection of Competition understands monopolistic activities as the abuse by a business entity or a group of parties of their dominant position, agreements or concerted actions prohibited by antimonopoly legislation, as well as other actions (or omissions) deemed to be monopolistic activities. The Law on Protection of Competition establishes a general prohibition of the performance of monopolistic activities. 89

101 In accordance with the Law on Protection of Competition, business entities include individual entrepreneurs, individuals not registered as individual entrepreneurs but who perform professional profit generating activities, commercial organizations, and noncommercial organizations carrying out profit generating activities. Based on the definition of monopolistic activities, it can be concluded that Russian legislation distinguishes several types of monopolistic activities, including the following: abuse of a dominant position by a business entity (Article 10 of the Law on Protection of Competition); agreements (concerted actions) between business entities that restrict competition (Article 11 of the Law on Protection of Competition); acts and actions (or omissions) of federal executive authorities, the Central Bank of the Russian Federation, state authorities of the constituent territories of the Russian Federation and local authorities, non-budget funds, and other bodies and organizations carrying out functions aimed at restricting competition (Article 15 of the Law on Protection of Competition); agreements (concerted actions) of federal executive authorities, state authorities of the constituent territories of the Russian Federation, local authorities, the Central Bank of the Russian Federation, non-budget funds and other bodies and organizations carrying out functions that restrict competition (Article 16 of the Law on Protection of Competition). The provisions of the Law on Protection of Competition devoted to the various types of monopolistic activities contain a significant number of prohibitions aimed at preventing actions or omissions which fall within the definition of said activities Abuse of a Dominant Market Position by a Business Entity The Law on Protection of Competition prohibits actions of business entities occupying a dominant market position resulting, or which may result, in non-admission, restriction, elimination of competition and (or) infringement of other parties interests. Pursuant to the Law on Protection of Competition, the following actions (or omissions) can be classified as abuses of a dominant market position: establishing, maintaining a monopolistically high or low price for goods, or an unreasonably high or low price for financial services; withdrawing goods from circulation, if such a withdrawal causes an increase in the price of the goods; 90

102 creating barriers to entering (or exiting) a goods market for other business entities; imposing contractual conditions upon a counterparty that are unfavorable, or that do not relate to the subject of the agreement; reducing or terminating the production of goods without any economic or technological reason, if such goods are in demand or orders have been placed for their supply, provided profitable manufacture of these goods is possible, and such a reduction or termination is not directly stipulated by legislative or judicial acts; creating discriminatory conditions; violating pricing procedure established by legal regulatory acts; establishing different prices (rates) for identical products without any economic, technological or other reason, unless federal laws stipulate otherwise; refusing or avoiding, without any economic or technological reason, to conclude an agreement with individual clients (customers), if it is possible to produce or supply the respective product and if such a refusal or avoidance is not directly stipulated by legislative or judicial acts. The established list of actions constituting a violation of antimonopoly legislation is not exhaustive. At the same time, it is particularly necessary to note that the abovementioned actions or omissions do not refer to actions connected with exercising exclusive rights to the results of intellectual activities and equal means of individualizing a legal entity, and means of individualizing products, works or services. Moreover, the above actions (omissions) may be recognized as acceptable if aimed at production improvements and the sale of goods, the stimulation of technical or economic progress, or an increase in the marketability of Russian-produced goods on the world commodity market, as well as if purchasers gain advantages (benefits) commensurate with the advantages (benefits) gained by the business entities as a result of such actions (omissions) Agreements (Concerted Actions) between Business Entities Restricting Competition In terms of the economic connection between colluding parties, two types of agreements (concerted actions) are established: horizontal and vertical. Horizontal collusive agreements, also known as cartels, are agreements (concerted 91

103 actions) between competing business entities operating in the market for the same product (interchangeable products). Vertical collusive agreements include agreements and concerted actions between business entities which are interconnected as sellers and purchasers, and which operate in a chain in consecutive markets for a product s promotion: manufacture wholesale retail sale. As a general rule, both horizontal and vertical agreements between business entities are prohibited. Russian lawmakers have accepted the international practice of prohibiting not only collusive agreements that have already entailed certain negative consequences, but also those which may entail such consequences in the future. It is necessary to note that only agreements between entities having autonomy of will, or real commercial, financial, or organizational independence, may be classified as collusive agreements. It is impossible, for instance, to construe agreements between a parent company and its subsidiaries, being completely under the parent company s control, as collusion. The prohibition of collusion does not apply to agreements on the provision and (or) alienation of the right to use the results of intellectual activities or means of individualization of a legal entity, as well as those of products, works or services. Vertical agreements are permitted provided that they are commercial concession agreements, or are concluded between business entities each having a market share not exceeding 20% (excluding agreements between financial organizations). The Law on Protection of Competition does not restrict the concerted actions of business entities, whose aggregate share in the commodity market does not exceed 20%, provided that each individual share in the commodity market does not exceed 8%. The Law on Protection of Competition provides for the recognition of certain agreements or concerted actions as permissible, if such agreements or concerted actions do not make it possible for any individuals to eliminate competition in the respective goods market, do not impose on the participants thereof, or on third parties, any restrictions not corresponding to the purposes of the agreements, as well as if the results or possible results of such agreements are: an improvement in production and sales of goods, the promotion of technical or economic progress, or an increase in the competitiveness of Russian products on the global goods market; advantages (benefits) for customers commensurate to those acquired by the business entities as a result of such agreements or concerted actions. 92

104 It should be noted that the permissibility or otherwise of certain agreements and concerted actions may be determined by the Government of the Russian Federation, in certain cases at the suggestion of the FAS. Business entities planning to reach an agreement that may be recognized as permissible have the right to apply to the FAS for a review of the draft agreement in relation to its compliance with the requirements of antimonopoly legislation. The maximum duration of consideration for such an application by the FAS may not exceed 50 days from the date all required documents and information are provided (the list of which is approved by Order of the FAS dated No. 168). The Law on Protection of Competition also prohibits the coordination of commercial organizations business activities resulting, or which may result, in a restriction of competition Requirements for the Procedure of Concluding Agreements Concerning State and Municipal Property In accordance with article of the Law on Protection of Competition, lease agreements and other agreements for the transfer of state and municipal property to individuals for their possession and/or use must be concluded on a competitive basis, through the holding of tenders or auctions for the right to conclude such agreements. The following cases are exceptions expressly stipulated by the Law on Protection of Competition, in particular: granting rights to property for a period not exceeding 30 calendar days; granting rights to property on the basis of international agreements and regulatory legal acts of the Russian Federation; transferring ceremonial buildings and structures and other religious property to religious organizations for gratuitous use; granting rights to property to state authorities, local authorities, as well as state non-budget funds, and the Central Bank of Russia. Furthermore, the said procedure for concluding agreements does not apply to property whose disposal is carried out in accordance with special laws: the Land Code of the Russian Federation, the Water Code of the Russian Federation, the Forest Code of the Russian Federation and Russian Federation legislation on subsoil and on concession agreements Antimonopoly Requirements for Auctions Article 17 of the Law on Protection of Competition establishes that during an auction, any actions that lead, or may lead, to non-admission, restriction or elimination of competition are prohibited. In particular, such actions include: 93

105 coordination of the actions of participants of an auction, or of the request for quotations by its organizers or customers; creating advantageous participation conditions in an auction, or in the request of quotations for one or several participants of an auction, or the request for quotations, including by means of access to information, unless federal law specifies otherwise; violation of the procedure for determining the winner(s) of an auction or of the request of quotations; participation in an auction or in the request for quotations by its organizers or customers and/or employees of the organizers or customers of the auction or the request for quotations. Additionally, it is prohibited to restrict access to participation in an auction or request for quotations, unless such a restriction is provided for by law, in cases where: the organizers or customers are federal state authorities, executive authorities of the constituent territories of the Russian Federation, local authorities, state nonbudget funds; or the auction is held, or the request for quotations is made, for the placing of orders for the supply of goods, performance of works, or provision of services for state or municipal needs. These additional restrictions are established for conducting auctions or making requests for quotations for the placement of orders for the supply of goods, performance of works, or provision of services for state or municipal needs. Pursuant to Article 18 of the Law on Protection of Competition, federal state authorities, executive authorities of the constituent territories of the Russian Federation, local authorities, state non-budget funds, and natural monopolies must select financial organizations for the provision of a range of financial services by means of an open tender or auction. Such services include: raising funds from legal entities for deposit; opening and maintaining bank accounts of legal entities, carrying out settlements under such bank accounts; services for keeping registers of security holders; 94

106 fiduciary management of securities; non-state pension schemes. If an auction has been held in breach of antimonopoly legislation, a court may invalidate the auction and void the transactions conducted Regulatory Acts and Actions of Authorities and Local Authorities Aimed at Restricting Competition Federal executive authorities, state authorities of the constituent territories of the Russian Federation, local authorities, other bodies and organizations performing functions of said authorities, organizations involved in the provision of state or municipal services, as well as state non-budget funds and the Central Bank of the Russian Federation are prohibited from adopting acts and (or) performing actions (or omissions) which lead to, or may lead to, the non-admission, restriction or elimination of competition, with the exception of the cases provided for by federal law (Article 15 of the Law on Protection of Competition). In particular, the following are prohibited: introducing restrictions on the creation of business entities in any field of activities, as well as prohibiting or introducing restrictions on certain activities, or the production of specific goods; preventing the performance of activities by business entities without valid grounds to do so, in particular by establishing requirements for goods or business entities not stipulated by legislation; prohibiting or restricting the free movement of goods in the Russian Federation, introducing other restrictions on business entities rights to sell, purchase, and otherwise acquire or exchange goods; issuing business entities instructions for priority supply of goods for a particular category of buyers (customers), or for the priority conclusion of agreements; establishing restrictions, regarding the choice of business entities providing such goods, for the buyers of these goods; granting a business entity access to information on a priority basis; creating discriminatory conditions. Article 15 of the Law on Protection of Competition also prohibits combining the functions of executive, local and other authorities with the functions of business entities, as well as vesting business entities with functions and rights of said 95

107 authorities, including functions and rights of state control and supervision authorities, with the exception of the cases stipulated by legislative acts of the Russian Federation Agreements (Concerted Actions) of Authorities and Local Authorities, State Non-Budget Funds and the Central Bank of the Russian Federation Restricting Competition Article 16 of the Law on Protection of Competition prohibits agreements and concerted actions between federal executive authorities, state authorities of constituent territories of the Russian Federation, local authorities, and other bodies or organizations, as well as state non-budget funds and the Central Bank of the Russian Federation, or between them and business entities, if such agreements (concerted actions) result in, or may result in, the non-admission, restriction or elimination of competition. In particular, these restrictions apply to agreements (concerted actions) that may lead to: an increase, reduction, or maintenance of prices (tariffs), with the exception of where such agreements are directly provided for by legislative acts; the establishment of different prices (tariffs) for identical products without an economic, technological or other reason; the division of a goods market based on a territorial principle, volumes of sales or purchases, the range of goods sold, or the composition of sellers or purchasers (customers); a restriction of access to a goods market, or the exit or elimination of business entities therefrom Unfair Competition The Law on Protection of Competition understands unfair competition as any actions by business entities (groups of parties) aimed at acquiring advantages in business activities which contradict Russian Federation legislation, standard business practices, integrity requirements, rationality and fairness, and which have inflicted or may inflict losses upon other competing business entities, or which have damaged or may damage their business reputations. Unfair competition is prohibited. The following in particular may serve as examples of unfair competition: spreading false, inaccurate, or distorted information that is capable of inflicting losses on another business entity or damaging its business reputation; 96

108 misinforming consumers as to the nature of goods, the means and place of production, the consumer characteristics of goods, the quality, quantity or the manufacturers of goods; inaccurately comparing goods that the business entity produces or sells with goods produced or sold by other business entities; selling, exchanging, or otherwise introducing goods that involve the illegal use of the results of intellectual activities, means of individualization of a legal entity, or products, works and services that are equated with the results of intellectual activities; illegally obtaining, using, and disclosing information that constitutes a professional, commercial or other legally protected secret State Authorities Control over the Observance of Antimonopoly Legislation and Economic Concentration One of the antimonopoly authorities most important tasks is to exercise state control over the observance of antimonopoly and other legislation of the Russian Federation, within the authority granted to them. Furthermore, within the framework of the said authority, the state antimonopoly authorities exercise control over a number of actions that may lead to a restriction of competition, and therefore to a violation of provisions of Russian Federation legislation. This section reviews certain forms of state antimonopoly control State Control over the Establishment, Reorganization, and Liquidation of Commercial and Noncommercial Organizations No later than 45 days after state registration, the antimonopoly authorities must be notified (Article 30 of the Law on Protection of Competition): by a commercial organization of its establishment as a result of merger of commercial organizations, as well as of consolidation with another commercial organization (with the exception of a merger or consolidation of financial organizations), if the aggregate value of the assets according to the latest balance sheets, or the aggregate sales revenue for the calendar year preceding the year of the merger or consolidation of the reorganized commercial organizations, exceeds 400 million rubles; by a financial organization of its establishment as a result of merger of financial organizations, as well as of consolidation with another financial organization, if the value of the assets of such a financial organization according to the latest balance sheet does not exceed the amount established by the Government of the Russian Federation. 97

109 Prior consent of the antimonopoly authorities is required for performing the following actions (Article 27 of the Law on Protection of Competition): a merger of commercial organizations or the consolidation of two such commercial organizations (with the exception of financial organizations), if: -- the aggregate value of their assets, (assets of their groups of parties) according to the latest balance sheets, exceeds 7 billion rubles or the aggregate sales revenues of such organizations (their groups of parties) for the calendar year preceding the year of the merger exceed 10 billion rubles; or -- one of the organizations is included in the register of business entities as having a greater than 35% share of the market for a particular product, or as occupying a dominant position in the market for a particular product. a merger of financial organizations or the consolidation of two such financial organizations, if the aggregate value of their assets, according to the latest balance sheets, exceeds the amount established by the Government of the Russian Federation; the establishment of a commercial organization, if its charter capital is made up of more than 25, 50 or 75% of voting shares, or of 1/3, 1/2 or 2/3 of participation interest in the charter capital and/or property (fixed production assets) of another commercial organization, if the value of such property exceeds 20% of the value of the assets of such an organization (with the exception of a financial organization), and at the same time: -- the aggregate value of assets according to the latest balance sheet of the founders (their groups of parties) and the parties (their groups of parties) whose shares (participation interest) and/or property are contributed to the charter capital exceeds 7 billion rubles, or the aggregate sales revenues of the founders and parties (their groups of parties) whose shares (participation interest) and/or property are contributed to the charter capital for the last calendar year exceed 10 billion rubles; or -- an organization whose shares (participation interest) and/or property are contributed to the charter capital is included in the register of business entities as having a greater than 35% share of the market for a particular product. establishment of a commercial organization, if its charter capital is made up of more than 25, 50 or 75% of voting shares, or of 1/3, 1/2 or 2/3 of participation 98

110 interest in the charter capital and/or assets of a financial organization, the amount of which exceeds the amount established by the Government of the Russian Federation, and at the same time the value of assets according to the latest balance sheet of the financial organization whose shares (participation interest) and/or assets are contributed to the charter capital exceeds the amount established by the Government of the Russian Federation. As a general rule, the antimonopoly authorities are required to make decisions within a maximum of 90 days from the date of receiving the necessary documents. However, if the antimonopoly authorities believe that the establishment (merger, consolidation) of an organization may lead to a restriction of competition, they prolong the term for considering the petition in order to determine the conditions upon whose fulfillment the antimonopoly authorities will decide to satisfy the petition. In such a case, the antimonopoly authorities are required to take a decision within a maximum of one year. If a commercial organization has been established (including by way of a merger or consolidation) without the prior consent of the antimonopoly authorities, or has violated the procedure for obligatory notification of the antimonopoly authorities, such an organization may be liquidated or reorganized by means of a split-off or separation through a judicial procedure upon a claim from the antimonopoly authorities, if the establishment of such an organization has led to, or may lead to, a restriction of competition, including as a result of the emergence or strengthening of a dominant position. Finally, a violation of the procedure for submitting petitions and notifications to the antimonopoly authorities entails the imposition of a fine on the established organization of an amount of up to 500,000 rubles State Control over the Observance of Antimonopoly Legislation during Acquisitions of Shares in the Charter Capitals of Commercial Organizations and in Other Cases Pursuant to Article 28 of the Law on Protection of Competition, the prior consent of the antimonopoly authorities is required in order to conduct the following transactions: acquisition of voting shares constituting more than 25% of the charter capital of a joint stock company registered in Russia, if prior to such an acquisition the party (group of parties) did not have shares in the company or had less than 25% of the shares (this requirement does not apply to the founders of a joint stock company during its establishment); acquisition of voting shares by a party (group of parties) having at least 25% and a maximum 50% of the voting shares, if such a party (group of parties) obtains the right to dispose of more than 50% of the voting shares in the joint stock company registered in Russia; 99

111 acquisition of voting shares by a party (group of parties) having at least 50% and a maximum 75% of the voting shares, if such a party (group of parties) obtains the right to dispose of more than 75% of the voting shares in the joint stock company registered in Russia; acquisition by a party (group of parties) of shares in the charter capital of a limited liability company registered in Russia, if such a party (group of parties) obtains the right to dispose of more than 1/3 of the shares in the charter capital of the given company, provided that, prior to this acquisition, such a party (group of parties) did not have shares in the charter capital of such a company, or had less than 1/3 of the shares (this requirement does not apply to the founders of a limited liability company during its establishment); acquisition of shares in the charter capital of a limited liability company registered in Russia by a party (group of parties) having at least 1/2 and a maximum 2/3 of the shares in the charter capital of the limited liability company, if such a party obtains the right to dispose of more than 2/3 of the said shares; receipt by a single business entity (group of parties), located in Russia, of the ownership, possession or use of fixed production assets (with the exception of land plots and non-production buildings / structures / constructions / premises / parts thereof / unfinished construction) and/or intangible assets of another business entity (with the exception of a financial organization), if the book value of the property constituting the subject of the transaction or associated transactions exceeds 20% of the book value of the fixed production and intangible assets of the business entity disposing of or transferring the property; acquisition by a party (group of parties), as a result of one or several transactions, of assets of a financial organization valued at an amount exceeding the amount established by the Government of the Russian Federation; acquisition by a party (group of parties), as a result of one or several transactions, of the rights to determine the conditions for a business entity to conduct business activities or to exercise the functions of its executive body; acquisition by a party (group of parties) of more than 50% of voting shares (participation interest) in a legal entity incorporated outside the territory of the Russian Federation, or of other rights that make it possible to direct the business activities of such a legal entity or perform the functions of its executive body. Antimonopoly authorities exercise governmental control over transactions as well as other actions with respect to voting shares (participation interest), and the rights of foreign persons or organizations delivering goods to Russia for an amount exceeding 1 billion rubles during the year preceding the date of such a transaction or other actions. In the same manner, Russian antimonopoly legislation applies to agreements 100

112 reached outside the territory of Russia between Russian and (or) foreign persons or organizations, as well as actions performed thereby, if such agreements or actions affect competition in Russia. For companies that are not financial organizations, prior consent to the abovementioned transactions is required if: the aggregate book value of the assets of the purchaser and the company whose participation interest, shares, production or intangible assets are being purchased, as well as their groups of parties, exceeds 7 billion rubles, or their aggregate sales revenues for the last calendar year exceed 10 billion rubles, and at the same time the value of the assets according to the latest balance sheet of the party (group of parties) whose shares, participation interest and/or property and/or the rights to which are being purchased, exceeds 250 million rubles; or one of the abovementioned parties is included in the register of business entities as having a greater than 35% share of the market for a particular product, or as occupying a dominant position in the market for a particular product. It should be noted that when determining the aggregate value of the assets of a party acquiring shares (participation interest, property) and its group of parties as well as of a party, whose shares (participation interest, property) are being purchased, and its group of parties, the assets of the party disposing of shares (participation interest) (the selling party) and its group of parties are not taken into consideration, if as a result of the transaction the selling party and its group of parties lose the rights which make it possible to direct the business activities of the party whose shares (participation interest, property) are being purchased. For financial organizations, prior consent to the abovementioned transactions is required if the value of the assets, according to the latest balance sheet of the financial organization, exceeds the amount established by the Government of the Russian Federation. In a case where transactions involving shares and/or assets of a credit organization is being conducted, such an amount is established by the Government of the Russian Federation upon agreement with the Central Bank of the Russian Federation. The term allocated for considering petitions is 30 days from the submission of all required documents, and may be extended by no more than two months due to any necessity to additionally review a petition. The antimonopoly authorities may reject a petition if: the transaction leads to a restriction of competition; 101

113 the submitted information, required for decision making, is inaccurate. Current legislation states that petitions may be approved even if the transaction involved may restrict competition. In such cases, along with taking the decision to accept the petition for consent to the transaction, the antimonopoly authorities simultaneously issue an order to take actions directed toward ensuring competition. A decision of the antimonopoly authorities to consent to transactions, subject to control, expires if such transactions are not concluded within one year following the date of receipt of consent. The antimonopoly authorities must be notified within 45 days after a respective transaction is conducted if the aggregate book value of the assets of the purchaser and the company (its group of parties), whose shares, participation interest or property (or rights thereto) are being purchased, or their aggregate sales revenues for the calendar year preceding the year of the transaction, exceeds 400 million rubles, and at the same time the aggregate value of the assets according to the latest balance sheet of the party (group of parties) whose shares, participation interest and/or property or rights to which are being purchased exceeds 60 million rubles. Transactions conducted in violation of the procedure established by the Law on Protection of Competition, and which lead to the emergence or strengthening of market dominance and (or) a restriction of competition, may be invalidated through a judicial procedure upon a claim from the antimonopoly authorities. Failure to adhere to the decisions of the antimonopoly authorities regarding the taking of measures to restore the conditions required for competition serves as grounds for the invalidation of the respective transaction upon a claim from the antimonopoly authorities Involuntary Split-Up (Split-Off) of Commercial Organizations and Noncommercial Organizations Conducting Business Activities If monopolistic activities are systematically performed by a dominant commercial organization or by a noncommercial organization carrying out profit generating activities, upon a claim from the antimonopoly authorities, a court is entitled to issue a judgment on the compulsory split-up of such an organization, or on the split-off of one or several organizations from the composition of the organization. The organizations created as a result of the compulsory split-up cannot be a part of one group. The court s respective decision is taken for the purposes of the development of competition if all of the following conditions are met: it is possible to separate structural subdivisions of the commercial organization; there is no technologically conditioned interconnection between the structural 102

114 subdivisions of the commercial organization (in particular, where 30% or less of the total volume of the products manufactured, works performed, and services rendered by a structural subdivision are consumed by other structural subdivisions of the commercial organization); the legal entities established as a result of the reorganization are able to operate independently in their respective goods markets. A court judgment on the compulsory split-up (split-off) of commercial organizations or noncommercial organizations conducting business activities must be carried out by the owner, or the body authorized by the owner, taking into account the requirements stipulated in said judgment, and within the time period determined therein, which must be at least six months Features of State Control over Economic Concentrations Created by a Group of Parties The abovementioned transactions and other actions requiring the prior consent of the antimonopoly authorities may be conducted without obtaining such consent, but with the subsequent notification of the antimonopoly authorities provided the following conditions are jointly met: the transactions and/or other actions are carried out by parties constituting one group; a list of the parties constituting the one group, indicating the grounds on which such parties are included in the group, has been submitted to the antimonopoly authorities not later than one month prior to conducting the transaction or carrying out the other actions; at the moment of conducting the transaction or carrying out the other actions, the list of the parties constituting this group has not changed from the list of the parties submitted to the antimonopoly authorities. The antimonopoly authorities must be notified of the transactions conducted and/or the other actions carried out not later than 45 days after they are conducted/carried out Appealing Decisions and Instructions of the Antimonopoly Authorities. Liability for Violating Antimonopoly Legislation As mentioned earlier, while exercising their powers and various forms of control over the observance of Russian Federation antimonopoly legislation, the antimonopoly authorities are entitled to adopt respective decisions and instructions to business entities, authorities, and officials of authorities and local authorities; for instance, re- 103

115 garding the restoration of the conditions necessary for competition in the market in question. The Law on Protection of Competition grants interested parties the right to appeal decisions and instructions of the antimonopoly authorities in a court or arbitration court. Pursuant to Article 52 of the Law on Protection of Competition, submitting a petition to a court suspends the implementation of a decision and instructions of the antimonopoly authorities until the court decision enters into legal force. An appeals petition may be filed within three months after the antimonopoly authorities have taken the respective decision (issued instructions). For a breach of antimonopoly legislation, a party bears liability in accordance with Russian Federation legislation. Article 19.8 of the Russian Federation Code of Administrative Offenses provides for the imposition of administrative fines on legal entities of up to 500,000 rubles. Chapter 22 of the Criminal Code of the Russian Federation Economic Crimes includes a number of articles establishing criminal liability for crimes related to monopolistic activities and the restriction of competition (for instance, Article 178 Non-Admission, Restriction or Elimination of Competition ). Additionally, a number of unlawful actions in this sphere are subject to criminal qualification under other articles of the Criminal Code of the Russian Federation. 6.4 The Federal Service for Financial Markets The Federal Service for Financial Markets is the state authority responsible for regulating and monitoring individuals and legal entities activities in the securities market. The main functions of the Federal Service for Financial Markets include: carrying out state registrations of securities issues and reports on the results of such issues, as well as registrations of securities prospectuses; ensuring the disclosure of information in the securities market in accordance with Russian Federation legislation; carrying out monitoring and control functions in relation to securities issuers, professional participants in the securities market, self-regulatory organizations thereof, share investment funds, management companies of share investment funds, unit investment funds, non-state pension funds and self-regulatory organizations thereof, commodity exchanges, etc; determining the main directions in securities market development and coordinating the activities of the federal executive authorities regarding issues involving the regulation of the securities market; 104

116 independently issuing regulatory legal acts on issues within its authority; exercising control and supervision over insurance and financial companies. The authorities and activities of the Federal Service for Financial Markets are described in greater detail in Section Regulation of the Securities Market. 6.5 Financial and Tax Authorities, Other Controlling Authorities The tax and financial authorities significantly influence all types of business activities. All investors will inevitably have dealings with them when implementing investment projects in Russia Tax Authorities of the Russian Federation Due to the ongoing reforms aimed at improving and increasing the efficiency of the structure of the state authorities, based on Decree of the President of the Russian Federation No. 314 dated March 9, 2004, the previous Ministry of Taxes and Levies of the Russian Federation has been reorganized into the Federal Tax Service, which has become a structural subdivision of the Ministry of Finance of the Russian Federation. According to said Decree, the functions for adopting regulatory legal acts on taxation, as well as for conducting explanatory works on Russian legislation on taxes and levies, have been transferred to the Ministry of Finance of the Russian Federation. The Tax Code of the Russian Federation (Section III, Chapter 5) and the Russian Federation Law On the Tax Authorities of the Russian Federation No dated March 21, 1991, are among the most important Russian Federation laws related to the tax authorities. Russian Federation legislation grants the tax authorities broad powers. In particular, they are entitled to: request from a taxpayer or a tax agent the documents upon which tax calculations and payments (withholdings and transfers) are based; conduct tax audits in the manner established by the Tax Code of the Russian Federation; suspend the operation of the bank accounts of taxpayers, levy payers, and tax agents, and seize their property; require that taxpayers, tax agents, and their representatives eliminate revealed violations of legislation on taxes and levies, and exercise control over the fulfillment of said requirements; 105

117 collect arrears on taxes and levies, and impose penalties in the manner established by the Tax Code of the Russian Federation; file petitions for the annulment or suspension of licenses issued to legal entities or individuals that allow them to perform certain types of activities; request documents from banks confirming the fulfillment of payment orders of taxpayers, payers of levies, and tax agents, as well as collection orders of tax authorities with respect to debiting tax and penalty amounts; engage specialists, experts, and translators for exercising control; to call as witnesses persons who may know of certain circumstances significant for exercising tax control; file claims in general jurisdiction and arbitration courts. Within the limits of this brochure it is impossible to comprehensively define all possible points of contact between foreign investors and the tax authorities of the Russian Federation. From the above partial list of powers vested in the tax authorities it is evident that such authorities directly influence all the activities of foreign investors in Russia. Foreign investors come into contact with the Russian tax authorities at the very beginning of their activities in the Russian Federation, as investment activities in the Russian Federation entail the registration of the persons obligated to pay taxes and levies, which is carried out by the tax authorities. Furthermore, in addition to the provisions of the Federal Law On Currency Regulation and Currency Control, discussed earlier, the Law of the Russian Federation On the Tax Authorities of the Russian Federation classifies the tax authorities as currency control agents Ministry of Internal Affairs of the Russian Federation Pursuant to the Decree of the President of the Russian Federation No. 306 dated March 11, 2003, the Ministry of Internal Affairs of the Russian Federation is instructed to perform functions related to the identification, prevention and constraint of tax crimes and offences. For the purposes of counteracting tax crimes and offences, the Federal Service of Economic and Tax Crimes has been created at the Ministry of Internal Affairs of the Russian Federation. The Provision on the Federal Service of Economic and Tax Crimes is approved by Order of the Ministry of Internal Affairs of the Russian Federation dated No The Order of the Ministry of Internal Affairs of the Russian Federation dated August 13, 2003, No. 634 has established the Head Administration for Combating Economic Crimes of the Federal Service of Economic and Tax Crimes, whose tasks include, in particular: 106

118 protecting persons and citizens rights and freedoms and property from criminal offenses; identifying, preventing, constraining and disclosing economic crimes falling within the authority of the criminal police, as well as crimes against state authorities committed within federal state authorities; organizational and systematic management of the activities of subdivisions in the system of internal affairs bodies of Russia for the purpose of identifying, preventing, constraining and disclosing economic crimes Federal Service for Financial Monitoring (Rosfinmonitoring) The Decree of the Government of the Russian Federation No. 307 dated June 23, 2004 approved the Provision On the Federal Service for Financial Monitoring that ensures the combating of the legalization (laundering) of illegally gained income and the financing of terrorism, as well as the development of state policy, legislative regulation, and the coordination of the activities of other federal executive authorities in this sphere. In particular, the Federal Service for Financial Monitoring has the following powers: controls and supervises the observance by legal entities and individuals of the requirements of Russian laws on combating the legalization (laundering) of illegally gained income and the financing of terrorism, holding liable persons that breached said laws; passes to the Government of the Russian Federation draft federal laws, regulatory acts of the President of the Russian Federation and the Government of the Russian Federation, and other documents concerning issues falling within the competence of the Service and requiring a resolution of the Government of the Russian Federation, as well as a draft activity plan and forecast activity indicators of the Service; independently adopts regulatory acts within its competence; collects, processes and analyzes information on operations (transactions) with monetary funds or other property subject to control in accordance with Russian laws, conducts audits, and in particular, receives necessary clarifications with respect to the information provided; controls operations (transactions) with monetary funds and other property; ensures the registration of organizations conducting operations (transactions) with monetary funds and other property, in whose sphere of activities there are no supervisory authorities, and prepares and make amendments to the list of orga- 107

119 nizations and individuals, with respect to which there is information about their participation in extremist activity; suspends operations (transactions) with monetary funds and other property; takes decisions on the undesirability of the staying (residence) of a foreign citizen or a stateless person in the Russian Federation; interacts with relevant authorities of foreign countries within its competence, and exchanges information therewith; submits information to law enforcement authorities if there is sufficient evidence to show that an operation (transaction) is connected with the legalization (laundering) of illegally gained income or the financing of terrorism, and provides this respective information upon the request of law enforcement authorities in accordance with federal laws. The necessity to interact with, and provide reports, to Rosfinmonitoring should be taken into consideration, especially by financial and lending organizations, and by leasing companies, when performing their activities Federal Service for Financial and Budgetary Supervision The Decree of the Russian Federation No. 278 dated June 15, 2004 approved the Provision On the Federal Service for Financial and Budgetary Supervision. This Service is a federal executive authority exercising control and supervision in the financial and budgetary sphere, performing the functions of a currency control body, as well as exercising external control over the quality of work of audit companies specified by the Federal Law On Auditing Activities. Like tax authorities, the Federal Service for Financial and Budgetary Supervision (Rosfinnadzor) is under the jurisdiction of the Ministry of the Finance of the Russian Federation. Rosfinnadzor has the following powers within its authority: controls and supervises the use of budget funds, resources of state extra-budgetary funds, federally owned tangible assets; controls the observance by residents and non-residents (other than lending institutions and currency exchanges) of currency legislation, as well as the compliance of currency transactions conducted with the provisions of licenses and permits; carries out, within its competence, administrative proceedings in accordance with legislation of the Russian Federation; provides clarification to legal entities and individuals with respect to issues falling within its competence. 108

120 6.6 Customs Authorities The customs authorities constitute a united federal centralized system. The activities of the Russian Federation customs authorities are primarily regulated by Federal Law No. 311-FZ dated November 27, 2010 On Customs Regulation in the Russian Federation. Pursuant to the latter, the system of customs authorities of the Russian Federation includes: a federal executive body authorized in the customs sphere - the Federal Customs Service of the Russian Federation (FCS of Russia); regional customs administrations; customs offices; customs posts. In addition to defining the structure of the customs authorities, the Law On Customs Regulation regulates in detail the issues concerning their activities and interactions with parties importing and exporting goods and transport vehicles to and from the Russian Federation. It should be noted that from July 6, 2010, due to the establishment of the Customs Union of the Republic of Belarus, Republic of Kazakhstan and the Russian Federation, and the entry into force of the provisions of the Customs Code of the Customs Union, the manner in which the customs authorities perform their functions has changed. The functions of the customs authorities within the framework of the Customs Union are regulated on both the international level and the level of each member state of the Customs Union. The general principles are set forth in the Customs Code of the Customs Union. For instance, it establishes a list of so-called customs procedures and the conditions for applying them, contains a list of customs payments and the procedure for calculating them, etc.). The customs authorities, in particular, carry out the following basic functions in the customs territory of the Customs Union: assisting in the implementation of the uniform trade policy of the Customs Union; performing customs operations and exercising customs control, including within the framework of providing mutual administrative assistance; collecting customs duties as well as special anti-dumping and compensatory duties; 109

121 ensuring, within their competence, the observance of customs and tariff regulatory measures, and prohibitions and restrictions with respect to goods transferred across the customs borders; ensuring, within their competence, measures for the protection of the national security of the member states of the Customs Union, human, animal and plant life and health, the environment, as well as, to the extent provided for by the international treaty between the member states of the Customs Union, measures for combating the legalization (laundering) of illegally gained income and the financing of terrorism, when moving the currencies of the member states of the customs union, securities and (or) currency values, and traveler s checks across the customs borders; revealing, preventing, and clamping down on administrative offences and crimes in accordance with the legislation of the member states of the Customs Union; ensuring the protection of intellectual property rights in the customs territory of the Customs Union, within their competence; maintaining customs statistics. Since legislation of the member states of the Customs Union may provide for other functions to be carried out by the customs authorities, in accordance with the Law On Customs Regulation, the FCS of Russia also performs the following duties in addition to the common functions of the customs authorities of the member states of the Customs Union: controls, within its competence, currency transactions connected with transfers of goods across the customs borders of the Customs Union, as well as the import of goods to the Russian Federation and their export from the Russian Federation, in accordance with the international treaties of the member states of the Customs Union, currency legislation of the Russian Federation, and regulatory acts of the customs regulation authorities adopted thereunder; provides clarifications to interested parties with respect to their rights and obligations in the sphere of customs relations, renders assistance, within its competence, to participants in foreign economic activity in the exercise thereby of their rights while they conduct customs operations with respect to goods and vehicles for international transportation. Attention should be paid to the fact that the Tax Code of the Russian Federation also contains rules regarding the powers of the customs authorities in the area of taxation. Thus, pursuant to Article 34 of the Tax Code of the Russian Federation, the customs authorities have the rights and bear the obligations of tax authorities, concerning the collection of taxes during the transfers of goods across the customs borders of the Customs Union of Russia, Belarus and Kazakhstan. 110

122 Participants in foreign economic activities should pay special attention to the fact that the customs authorities may hold parties liable, in the manner established by customs legislation, for violating tax legislation in the course of transferring goods across the customs borders of the Customs Union. These said powers apply to value-added tax and excises. 6.7 Governmental Commission for Control over Foreign Investments in the Russian Federation In connection with the adoption of the Federal Law On the Procedure for Making Foreign Investments in Business Entities of Strategic Importance for Ensuring the Defense of the Country and the Security of the State dated No. 57-FZ, the Government of Russia has formed a new federal executive authority the Governmental Commission for Control over Foreign Investments in the Russian Federation and approved the Provision on this authority (Decree of the Government dated No. 510). The main task of the Governmental Commission is approving transactions of foreign investors that involve the investor, or the group of parties in which it is included, establishing control over business entities of strategic importance for ensuring the defense of the country and the security of the state. Such business entities are discussed in greater detail in Section Investments in Businesses which are Strategically Important. The list of the types of activities of strategic importance for national defense and security is set forth in legislation. In particular, the commission: considers and decides upon petitions for the prior approval of transactions that entail the investor establishing control over companies, and for approving the establishment of control; determines the list of obligations imposed upon a foreign investor, or legal entity or individual as part of the group of parties, associated with a transaction. For the fulfillment of its tasks, the commission is vested with the right to request that federal executive authorities and organizations provide materials and information on issues pertaining to its authority, to engage representatives and specialists thereof for its work, to exercise control over the fulfillment of its decisions, as well as to take other actions. 111

123 7. Court System. Arbitration Courts 7.1 General Information on the Court System of the Russian Federation Concept of the Court System of the Russian Federation The court system is traditionally defined as the entirety of all state courts in the territory of the Russian Federation. State courts administer justice as one of the state functions, and no other state authorities are entitled to administer justice in the name of the Russian Federation. At the same time, it should be noted that the adoption of the law regulating the activities of international arbitration courts in 1993, followed by the adoption of the law on internal arbitration courts in 2002, provide grounds to assume that in the near future international commercial arbitration and arbitration courts are likely to continue to develop alongside the traditional court system. A significant number of permanently active arbitration courts operate in the country, several of which are held in quite high esteem by the business community, including the fact that legal proceedings are guided by authorized representatives of legal science. The number of internal disputes being referred to arbitration courts by parties, and the number of cases using alternative (pretrial) means of dispute settlement, will also continue to grow. Section 7.4 Arbitration Courts in the Russian Federation provides information on the arbitration court procedure and its advantages Russian Federation Legislation on the Court System Court reforms in the Russian Federation in significantly changed civil and business legal proceedings. The basis for the adoption of the new legislative acts on legal proceedings is the Russian Constitution, dated December 12, 1993, together with the Federal Constitutional Law On the Court System of the Russian Federation, dated December 31, On September 1, 2002, the new Arbitral Procedural Code of the Russian Federation entered into force, and as of February 1, 2003, the new Civil Procedural Code of the Russian Federation has also been effective. Additionally, on July 27, 2002, the Federal Law On Arbitration Courts in the Russian Federation, No. 102-FZ dated July 24, 2002, came into force. These significant changes to procedural law stem from the intention to modernize and improve the process of administering justice, and to more clearly distinguish the jurisdictions of general and arbitration courts on the basis of modern economic reality, as well as to provide for the establishment of more stable and consistent court practice. 112

124 The growing role of arbitration courts in the resolution of certain specific categories of disputes should be noted, as this should lead to a certain re-distribution of the amount of cases between arbitration and state courts. Apart from the abovementioned laws, the most important laws in the sphere of dispute resolution also include: The Federal Constitutional Law On Arbitration Courts in the Russian Federation, No. 1-FKZ dated April 28, 1995; The Federal Constitutional Law On the Constitutional Court of the Russian Federation, No. 1-FKZ dated July 21, 1994; The Federal Law On Arbitrators in the Russian Federation, No. 188-FZ dated December 17, 1998; The Law of the Russian Federation On International Commercial Arbitration, No dated July 7, Structure of the Court System of the Russian Federation The state court system of the Russian Federation includes: Constitutional courts (the Constitutional Court of the Russian Federation and constitutional (charter) courts of the constituent territories of the Russian Federation); General jurisdiction courts; Arbitration courts. Most disputes either directly or indirectly connected with investment fall within the competence of arbitration courts, and are considered thereby as well as by general jurisdiction courts. The resolution of disputes between legal entities or individual entrepreneurs connected with business activities falls within the competence of the arbitration courts. General jurisdiction courts hear disputes involving citizens, including disputes arising out of legal issues in relation to civil, family, labor law, and inheritance matters. One of the most important amendments in the new legislation is the more detailed distribution of the jurisdiction of arbitration courts and general jurisdiction courts; for instance, lawsuits of private shareholders brought against joint stock companies and other corporate disputes. Following the reform of procedural law, such claims fall under the jurisdiction of the arbitration courts. 113

125 Based on the administrative-territorial division of the Russian Federation and established competence, federal courts and courts of the constituent territories of the Russian Federation are distinguished in the judicial hierarchy. In accordance with the Federal Constitutional Law On the Court System of the Russian Federation, federal courts include: The Constitutional Court of the Russian Federation; The Supreme Court of the Russian Federation; Courts comprising the middle level of the general jurisdiction courts of the Russian Federation, namely: supreme courts of republics, regional courts, courts of cities of federal significance, courts of autonomous regions and autonomous areas; District courts; Courts-martial and specialized courts; The Supreme Arbitration Court of the Russian Federation; Federal Arbitration Courts of the districts; Commercial Appellate Courts; Arbitration courts of the constituent territories of the Russian Federation. Courts of the constituent territories of the Russian Federation include: Constitutional (charter) courts of the constituent territories of the Russian Federation; Arbitrators. 7.2 Arbitration Courts in the Russian Federation Competence of Arbitration Courts In general, the competence of the arbitration courts may be defined as the competence to consider economic disputes connected with the involvement of organizations and persons engaged in various types of entrepreneurial activities. Furthermore, cases concerning the entrepreneurial and economic activities of public establishments such as the Russian Federation, its constituent territories, state bodies, etc., also fall within the limits of the competence of the arbitration courts. Arbitration courts also consider disputes concerning the determination of facts of 114

126 legal significance, for instance, the determination of legal entities titles to real estate, or the determination of the fact of state registration of legal entities carried out at particular times and in particular places. Moreover, the competence of arbitration courts also covers bankruptcy cases involving organizations and individual entrepreneurs Consideration of Cases in Arbitration Courts (Arbitrages) General Provisions The Russian Federation Arbitral Procedural Code is the main law regulating the procedure for the consideration of cases in arbitration courts. The arbitration process is characterized by the following procedure, which shows the progress and the various instances involved in a case: first instance, appellate instance, cassation instance, supervisory instance. Judgments issued by arbitration courts may be reconsidered in the event of newly discovered circumstances Consideration of Cases in Courts of First Instance First instance proceedings are initiated by filing a claim. For this purpose, the plaintiff pays the state duty for case consideration by an arbitration court and files a claim, prepared in accordance with the requirements of the Arbitral Procedural Code of the Russian Federation, with an arbitration court. Such a claim may be filed with an arbitration court through its secretarial office, by post, or by . Copies of the claim and the documents attached thereto are sent by the plaintiff to the defendant. Upon receipt of the claim, the defendant is entitled to file a statement of defense with the arbitration court, reflecting the defendant s interpretation of the disputed matters. A copy of the statement of defense is sent to the plaintiff. If the content and form of the claim are satisfactory, the arbitration court issues a ruling to accept the claim and moves on to the stage of preparing the case for court hearing. At this stage, the court determines the parties positions, considers their petitions (requests), assists them in obtaining additional evidence, and performs other preparatory actions. It is at this stage that the parties should, in accordance with the general rule, provide the evidence they have to prove their position. Adding new evi- 115

127 dence at subsequent stages in the consideration of a case is allowed as an exception under certain circumstances. Upon his/her acknowledgement that the case is ready, the judge, in consideration of the parties opinions, schedules a court hearing, the time and place of which the parties are notified of beforehand. At the stage of the court hearing, the merits of the dispute are considered: the court considers the parties positions and evidence, hears the parties arguments (parties oral pleadings), poses questions to the parties, and subsequently makes a decision. The total time for consideration of a case at the court hearing stage may not exceed one month from the day the court issued the ruling to schedule court hearings on the case. In practice though, this term can be significantly longer Consideration of Cases in Appellate Courts On the basis of an appeal, commercial appellate courts (arbitrages), based on the evidence submitted in the case and additional evidence admitted as an exception, consider cases for the second time, i.e. they re-assess the evidence upon which the Arbitration Court of the First Instance issued its judgment, before the judgment enters into force. An appeal against a judgment may be submitted by any person who participated in the case, and by those who did not participate in the case but whose rights and obligations were stipulated by the court in a judicial act. Considering a complaint, an appellate court either considers the case once more in full, or restricts itself to the certain points formulated in the letter of appeal, provided there are no objections from the participants in the case. An appeal may be filed within one month after the relevant judgment of the arbitration court. The term for appeal consideration in the appellate instance may not exceed one month from the date of submission of the claim to the appellate court. Appellate arbitration courts are entitled to: uphold the judgment rendered by a court of first instance, and decline the claim, cancel or change, partially or fully, the judgment rendered by a court of first instance, and issue a new decision, partially or fully cancel the judgment and dismiss the case, or partially or fully decline an application Consideration of Cases in Courts of Cassation Cassation procedure is applied to check the validity of judgments rendered by courts of first instance and appellate courts, and which have entered into force. An applica- 116

128 tion for review of a case may be submitted by any person who participated in the case, and by those who did not participate in the case but whose rights and obligations were stipulated by the court in a judicial act. Cassation appeals are filed with the arbitration court that rendered the decision being appealed against. Furthermore, cassation appeals must be filed, together with the court cases, with the respective arbitration court of cassation, which is an arbitration court of the respective court district of the Russian Federation. New evidence may not be provided to a court of cassation. Considering a cassation appeal, a district arbitration court does not re-assess the evidence, but merely determines whether the lower court applied legislation correctly with respect to the factual circumstances, which were determined by the lower court. According to the general rule, a cassation appeal may be filed with respect to the judgment of an arbitration court within two months of the entry into force of the initial decision or judgment of an appellate court. A court of cassation considers an appeal within one month of the moment of receipt of the claim, along with case materials. Courts of cassation are empowered to: retain the judgment of an arbitration court of first instance and the judgment of the appellate court, and (or) decline the cassation appeal; cancel or change the judgment of a court of first instance, and (or) the judgment of the appellate court partially or fully, and issue a new judgment without sending the case back for reconsideration; cancel or change the judgment of a court of first instance, and (or) the judgment of the appellate court partially or fully, and send the case back for reconsideration by the lower arbitration court; cancel or change the judgment of a court of first instance, and (or) the judgment of the appellate court partially or fully, and send the case back for reconsideration by a lower arbitration court, which will not be the court that issued the judgment under reconsideration, if the case is reviewed again by a court of cassation instance; cancel the judgment of a court of first instance and (or) the judgment of the appellate court partially or fully, dismiss the case, or leave the case without consideration, partially or fully; retain one of the previously issued judgments Supervisory Court Proceedings The Supreme Arbitration Court of the Russian Federation is entitled to reconsider, 117

129 in accordance with the supervisory procedure, judicial acts that came into effect on the basis of applications of parties involved in the litigation, or upon presentation by a public prosecutor. Apart from the indicated parties, an application for review may be submitted by parties not involved in the litigation, but whose rights and obligations were stipulated by the court in a judgment. The law establishes the term for filing such applications as up to three months from the day of the last judgment on the relevant case, provided that other possibilities for verification of the lawfulness of the said act in accordance with court procedure have been exhausted. Complaints and applications for the review of cases submitted in accordance with the supervisory procedure are considered under a special procedure, which means that prior to consideration of the merits, the case undergoes a review. This is initially undertaken individually by a judge of the Supreme Arbitration Court of the Russian Federation, and then by a committee of judges of the Supreme Arbitration Court of the Russian Federation, who decide whether the case is subject to reconsideration under the supervisory procedure. Within the framework of the supervisory procedure, the Supreme Arbitration Court of the Russian Federation is not involved in collecting and assessing evidence, but verifies the validity of material and procedural law application by the arbitration court that issued the judgment that is under protest. At the same time, judgments are reconsidered at this stage only if they have a special social meaning they violate court practice, human rights and freedoms, or concern interests of a certain group of people. The powers of the Supreme Arbitration Court in relation to the consideration of a case in accordance with the supervisory procedure are practically the same as those of the court of cassation described above Reconsideration of Judgments due to New or Newly Discovered Circumstances The option to reconsider a judgment is aimed at ensuring the lawfulness of judgments which at the moment of their issue had no legal shortcomings, but with respect to which some grounds for reconsideration have arisen or been revealed. In accordance with the law, newly discovered circumstances are as follows: circumstances material for the case were not, and could not, have been familiar to the claimant as of the issue of the judgment being reconsidered; an effective judgment establishes the falsification of evidence, a knowingly false expert conclusion, knowingly false witness testimony, or a knowingly false translation, which has led to the issue of an illegal or unfounded judgment on the case; 118

130 an effective judgment establishes criminal acts of a person involved in the case or a representative thereof, or criminal acts committed by the judge in the course of consideration of the case. New circumstances are as follows: a judicial act of an arbitration court or general jurisdiction court, or decree of another body, that served as the basis for the adoption of the judicial act, is cancelled; the transaction that entailed the adoption of an illegal or unfounded judicial act is recognized as void by an effective judgment; the law applied to a particular case by an arbitration court is recognized as being inconsistent with the Constitution of the Russian Federation; the European Court of Human Rights establishes that the provisions of the Convention for the Protection of Human Rights and Fundamental Freedoms were violated in the course of consideration of a particular case by an arbitration court; law enforcement practice is established or amended by a decree of the Plenum of the Supreme Arbitration Court of the Russian Federation, or by a decree of the Presidium of the Supreme Arbitration Court of the Russian Federation, if the respective act of the Supreme Arbitration Court of the Russian Federation provides for the possibility of reconsidering effective judicial acts due to this circumstance. Reconsideration may be initiated by parties involved in the court procedure related to the case. An application must be filed within three months from the day of commencement or disclosure of the relevant circumstance. Reconsideration of a case due to new or newly discovered circumstances must be carried out by the arbitration court that issued the initial judgment on the case. The outcome of a reconsideration of an appeal may be either the cancellation of such a judgment or a refusal to satisfy the application for appeal. If it is satisfied, the arbitration court reconsiders the case, taking into account the new or newly discovered circumstances, during either the same session, or during a specially appointed session. 7.3 General Jurisdiction Courts of the Russian Federation Competence of General Jurisdiction Courts The competence of general jurisdiction courts with respect to court disputes is regulated by the rules established by the Civil Procedural Code of the Russian Federation. Depending on the subject of the court proceedings, various courts, including the Russian Federation Supreme Court, may act as the court of first instance. Hence, 119

131 the Russian Federation Supreme Court of first instance may only resolve disputes of the utmost importance, such as cases related to challenges to non-statutory acts of the President of the Russian Federation. In the remaining cases, the Russian Federation Supreme Court acts as a court of cassation or a supervisory court, the powers of which are described below. The majority of significant cases of first instance are heard by district courts Consideration of Cases in General Jurisdiction Courts General Provisions The competence of general jurisdiction courts is determined by the rules of the Civil Procedural Code of the Russian Federation. Disputes in general jurisdiction courts can be heard at four levels: courts of first instance, appellate courts (for cases where the first instance was considered by an arbitrator), courts of cassation, supervisory courts. In addition, general jurisdiction courts may reconsider court judgments in connection with newly discovered or new circumstances. According to the general rule, the competence of general jurisdiction courts includes disputes not connected with economic activities performed by individuals, companies, state or local authorities, in particular disputes arising from civil, family, labor, or ecological legal relations Consideration of Cases in Courts of First Instance As is the case with arbitration courts, proceedings at general jurisdiction courts are initiated by filing a claim. For this purpose, the plaintiff pays the state duty and files a claim prepared in accordance with the requirements of the Civil Procedural Code of the Russian Federation. The claim must be accompanied by a certain quantity of copies corresponding to the number of defendants and other parties involved in the dispute. If the content and form of the claim are satisfactory, the judge, within five days of receipt of the documents, decides to accept the claim and moves on to the stage of preparing the case for the court hearing. At this stage, the court sends copies of the claim and the documents attached thereto to the defendant, determines the parties positions, considers their petitions (requests), assists them in obtaining evidence that 120

132 the parties are, for whatever reason, unable to independently obtain, and performs other preparatory actions. At the preparatory stage, the court allows the defendant to present its objections (statements of defense) to the claim. The defendant is required to send copies of the statement of defense and the documents attached thereto to the plaintiff. Upon his/her acknowledgement that the case is ready, the judge schedules a court hearing, the time and place of which the parties are notified of beforehand. At the stage of the court hearing, the court hears the arguments of the parties and other persons involved in the case, poses questions to them, studies the evidence presented, and, if necessary, summons witnesses, experts, and specialists. The court hearing is closed by the parties arguments (oral pleadings), after which the court reaches a judgment. The term for considering a civil dispute at a general jurisdiction court may not exceed two months from the day on which the court received the claim, and for an arbitration court such a term may not exceed one month from the day on which the claim was accepted. Legislation establishes shorter consideration terms for certain categories of disputes Consideration of Cases in Appellate Courts Judgments of courts of first instance that have not entered into effect may be appealed against in general jurisdiction courts under the appeal procedure. The deadline for filing an appeal is one month from the issue of the final form judgment being appealed against. After this period expires, the judgment of the court of first instance comes into effect and may be appealed against only under the cassation or supervisory procedure. An appellate court completely reconsiders the case. In particular, an appellate court has the right to establish new facts and study new evidence. As a general rule, an appeal case shall be considered within not more than two months. An appellate court is entitled to: retain the judgment of the court of first instance, decline the appeal or recommendation; cancel or change the judgment of a court of first instance partially or fully, and issue a new judgment under the case; cancel the judgment of a court of first instance partially or fully and dismiss the case, or leave the appeal without consideration partially or fully. 121

133 Consideration of Cases in Courts of Cassation Courts of cassation review effective rulings on the basis of appeals brought by litigation participants, persons whose rights or legal interests were violated by such rulings, as well as on the basis of recommendations from the Prosecutor s Office of the Russian Federation. Court rulings may be appealed against in courts of cassation within six months of their entry into effect, provided that other means of appeal were exhausted prior to their entry into effect. A cassation appeal (recommendation) is considered by a judge of the court authorized to consider it, taking into account the materials attached thereto (within one month) or materials of the case evoked (within two months). As a result of consideration, the judge issues a ruling: on refusal to take the cassation appeal or recommendation to the court of cassation for consideration at a court hearing, if there are no grounds for reconsideration of the court rulings under the cassation procedure; or on taking the cassation appeal or recommendation, along with the case, to the court of cassation for consideration at a court hearing. If a ruling on taking the appeal for consideration is issued, such an appeal, as a general rule, shall be considered within one month. The court of cassation reviews the correctness of the application and construction of the rules of substantive law on the basis of the argumentation stated in the cassation appeal, as well as in objections provided thereto. At the same time, the court does not review the evidence and previously established (rejected) circumstances of the case. As a result of consideration of the appeal (recommendation), the court of cassation is entitled to: retain the court ruling, decline the cassation appeal or recommendation; cancel the court ruling partially or fully and refer the case for reconsideration to the respective court; cancel the court ruling partially or fully and leave the appeal without consideration, or dismiss the case; retain one of the previously issued court rulings; 122

134 cancel or change the court ruling and issue a new court ruling without referring the case for reconsideration Supervisory Court Proceedings Under the supervisory procedure, the Presidium of the Supreme Court of the Russian Federation may review judgments of courts of the constituent territories of the Russian Federation issued thereby within the framework of first instance, as well as judicial acts of the Supreme Court of the Russian Federation. A respective appeal (recommendation) may be filed by persons involved in the case, or by other persons if their rights, freedoms or lawful interests have been violated by court rulings, as well as by the Prosecutor-General of the Russian Federation and the Deputies thereof. A supervisory appeal (recommendation) is considered by a judge of the Supreme Court of the Russian Federation, taking into account the materials attached thereto (within two months) or materials of the case evoked (within three months). As a result of consideration of the supervisory appeal, the judge of the Supreme Court of the Russian Federation issues a ruling: on refusal to take the supervisory appeal or recommendation to the Presidium of the Supreme Court of the Russian Federation for consideration at a court hearing, if there are no grounds for reconsideration of the court rulings under the supervisory procedure; on taking the supervisory appeal or recommendation, along with the case, to the Presidium of the Supreme Court of the Russian Federation for consideration at a court hearing. A supervisory appeal or recommendation shall be considered by the Presidium of the Supreme Court of the Russian Federation at a court hearing within not more than two months of the issue of the respective court ruling by a judge. As a result of consideration, the Presidium of the Supreme Court of the Russian Federation is entitled to change or cancel the respective court ruling if it violates: rights and freedoms of the person and of the citizen guaranteed by the Constitution of the Russian Federation, universally accepted principles and provisions of international law, international treaties of the Russian Federation; rights and lawful interests of the general public or other public interests; uniformity of construction and application by courts of provisions of law. 123

135 Reconsideration of Judgments due to Newly Discovered or New Circumstances Reconsideration of court judgments due to newly disclosed or new circumstances, along with the judicial supervision discussed in Section Supervisory Court Proceedings, is a form of reconsideration of judicial judgments which have already entered into force. The law lists a number of grounds for the reconsideration of judgments on account of newly disclosed or new circumstances. In general terms, such grounds are connected to the discovery of facts which existed at the time of litigation and were essential for the case, but which were not known and could not have been known to the appellant due to certain reasons (including the intentional non-disclosure of the facts by a false witness), or facts that arose after the issue of a court ruling and are essential for the correct resolution of the case (e.g. the invalidation of a transaction by court). The reconsideration of cases due to newly discovered or new circumstances is conducted in the same courts that issued the decisions which are being reconsidered, and if courts of supervisory or cassation instances have changed the lower courts decisions or have rendered new decisions, reconsideration is conducted in these courts. An appeal for the reconsideration of a judgment due to newly discovered circumstances may be filed by the litigants or by the prosecutor within three months from the day on which the respective circumstances were disclosed. 7.4 Non-State Arbitration Courts in the Russian Federation General Provisions The tradition of resolving disputes involving foreign litigants in international commercial arbitration courts in the Russian Federation dates back to Soviet times. In many respects this is due to the fact that the recognition and enforcement of foreign arbitral awards in the Soviet Union was much hampered, and indeed Soviet court judgments encountered similar difficulties abroad, due to the fact that there were no agreements entered into with a number of states on the reciprocal recognition and enforcement of arbitral awards. To a certain extent the situation has, as of yet, not changed, for example in Russian-German relations. However, the situation is different in the sphere of International Commercial Arbitration. The United Nations Convention On the Recognition and Enforcement of Foreign Arbitral Awards was drafted and adopted in To date, more than 120 countries have acceded to this convention, including member countries of the European Union and the CIS states. This indirectly offers evidence of the practical efficiency of the Convention. The Russian Federation (USSR) has been a party to the Convention since

136 There is a general trend towards enlarging the scope of the application of non-governmental arbitration procedures both in international and domestic disputes. Among the non-governmental arbitration courts continuously operating on the territory of the Russian Federation, the following are worthy of note as regards their significance and the number of disputes resolved: The International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (Moscow), The Arbitration Courts at the Chambers of Commerce and Industry in Moscow, St. Petersburg, Nizhny Novgorod, Novosibirsk, Yekaterinburg, and a number of other large economic centers in the Russian Federation. The resolution of disputes between German and Russian parties is traditionally referred to the Arbitration Institute of the Stockholm Chamber of Commerce (Sweden) (SCC Institute), the Arbitration Institute of Germany (DIS), or the International Arbitration Court of the International Chamber of Commerce in Paris Separate Categories of Disputes Considered by Non-Governmental Arbitration Courts Arbitration proceedings generally apply to civil and business legal relations. With regard to business activities, arbitration agreements/clauses are most often inserted in trade agreements, in particular, in sale and purchase agreements, supply agreements, contracts of carriage, etc. In addition, non-governmental arbitration courts, in general, may resolve collective labor disputes. Using this option, employers and employees can settle conflict situations on a more equal basis Legislation on Non-Governmental Arbitration Courts in the Russian Federation As a result of judicial reform, the statutory acts governing the procedural rules in non-governmental arbitration courts, and the procedure for recognizing and enforcing judgments, were thoroughly updated by In addition to the Federal Law On Non-Governmental Arbitration Courts in the Russian Federation and the Russian Federation Law On International Commercial Arbitration, regulating clauses are also provided for in the Arbitral Procedural Code of the Russian Federation (Chapters 30, 31) and in the new Civil Procedural Code of the Russian Federation (Chapters 45, 46, and 47). 125

137 7.4.4 Preconditions for Commencing Non-Governmental Arbitration Proceedings The most important condition for transferring a dispute to an international commercial arbitration court, or to a domestic non-governmental arbitration court, is the condition that the parties to the dispute have entered into an arbitration agreement (arbitration clause). Such an agreement (clause) may specify a particular non-governmental arbitration court, the scope of its competence in adjudication, the applicable law, the language to be used in the proceedings, and the place of arbitration Advantages of Resolving Disputes in Non-Governmental Arbitration Courts A number of advantages of non-governmental arbitration court proceedings, in comparison to state court proceedings, may be mentioned. Some of these advantages include: The parties independent appointment of the arbitrator. In appointing the arbitrator, the parties have the opportunity to pay due attention to all the particularities of the dispute, and to appoint an arbitrator of appropriate experience and expertise. Relative simplicity of the proceedings. The rules of non-governmental arbitration procedure are only roughly outlined, thus providing the parties and the court with the opportunity to conduct the arbitration proceedings in an individual manner. Final and binding effect of arbitral awards. According to the general rule, no appeals are permitted with respect to rendered arbitral awards. Arbitral awards are binding on the parties involved in the non-governmental arbitration proceedings. Enforceability of international commercial arbitration courts awards in the majority of countries. (This advantage is due to the wide range of countries participating in the United Nations Convention On the Recognition and Enforcement of Foreign Arbitral Awards of Confidentiality of arbitration court proceedings. Most disputing parties opt for non-governmental arbitration courts in particular due to their high degree of confidentiality of information, as the disclosure of such information in the context of an open trial in a state court can damage a disputing party s financial standing and reputation. 126

138 7.5 Alternative Dispute Resolution General Provisions In addition to the abovementioned methods for resolving disputes in court, current Russian legislation establishes a number of rules that provide for the amicable settlement of disputes. In particular, the mediation procedure is regulated by the Federal Law On Alternative Procedure for Dispute Resolution with the Participation of a Mediator (Mediation Procedure). Often, mediation procedures are faster and more efficient than court or arbitration proceedings, as they allow partners to maintain stable business relations and confidentiality. At the present time, in Russia, there is a significant number of conciliation centers resolving disputes through a mediation procedure. In general, it should be noted that the practice known worldwide as alternative dispute resolution is generally becoming more and more widely used in Russia. The spheres of application of alternative dispute resolution are discussed below Contractual Relations The dispute resolution procedure established by the Federal Law On the Alternative Procedure for Dispute Resolution with the Participation of a Mediator (Mediation Procedure) may be applied to any disputes arising from civil relations (including contractual relations). Contractual parties may enter into an agreement on the application of a mediation procedure to regulate disputes that have arisen, or may arise, from particular relations (including in the form of a mediation clause in the agreement). In particular, such an agreement may stipulate the parties obligation not to go to court (non-governmental arbitration court) for a certain period of time. The mediation procedure commences from the date of conclusion, by the parties, of an agreement on the application of such a procedure determining the subject matter of the dispute, mediators and other conditions regulating the procedure. If the dispute is resolved successfully, the parties to the dispute sign a mediation agreement determining their obligations, and the terms and conditions agreed upon by them. Such an agreement constitutes a transaction under civil law, and the rights that may be violated if it is not fulfilled (not duly fulfilled) are protected by using remedies stipulated by civil law. 127

139 7.5.3 Labor Law The mediation procedure described above in Section Contractual Relations may be used to resolve individual labor disputes. The Labor Code of the Russian Federation sets forth special conciliation procedures for the amicable settlement of collective labor disputes by way of consideration of disputes by a conciliation commission, or with the aid of independent mediators who should assist the parties in reaching a settlement agreement. It would appear that alternative labor dispute resolution procedures for the settlement of collective disputes are more favorable for employers, as independent mediators take into account both employers positions and trade unions positions Bankruptcy Law The Federal Law On Insolvency (Bankruptcy) No.127-FZ dated October 26, 2002, directly names the settlement agreement approach as one of the bankruptcy procedures. A settlement agreement may be concluded between a debtor, on the one hand, and creditors and authorized bodies, on the other hand, at any stage of a conflict. 128

140 8. Enforcement Proceedings. Bankruptcy 8.1 Enforcement Proceedings General Provisions Rulings of state courts, arbitration courts, and other authorized agencies may be carried out either voluntarily by the debtors, or through enforcement proceedings. The conditions and procedure of enforcement proceedings of rulings by courts and other authorized agencies and officials are regulated by the Federal Law On Enforcement Proceedings No. 229-FZ dated 2 October Legislation on enforcement proceedings also includes the Federal Law On Bailiffs No. 118-FZ dated 21 July 1997, and other federal laws, acts of other authorities and officials, regulating the conditions and procedure of enforcement proceedings. The enforcement of court judgments and arbitration court judgments is mainly executed on the basis of a writ of execution, which is issued by a court. A writ of execution is the document which confirms the judgment creditor s right to enforce the court judgment. It should be noted that, apart from writs of execution, the enforcement procedure may be performed on the basis of a number of other documents. The following judgments may act as the basis for the issue of a writ of execution: judgments of general jurisdiction courts; awards of arbitration courts; awards of international commercial arbitration courts; awards of internal non-governmental arbitration courts; awards of foreign state courts. The state body authorized to implement writs of execution is the Federal Bailiffs Service. A writ of execution is presented for enforcement at the place of execution of the judgment. According to the general rule, the place of execution is the debtor s place of residence, or the location of the debtor s property. As already mentioned, awards of foreign international commercial arbitration courts must be enforced on the territory of Russia in accordance with the 1958 UN Convention On the Recognition and Enforcement of Foreign Arbitral Awards. Petitions for 129

141 the enforcement of an award of a foreign commercial arbitration court must be filed, depending on the nature of the dispute, with the general jurisdiction court or with the arbitration court, at the debtor s place of residence (state registration) or the location of the debtor s property. Awards of foreign state courts are recognized and enforced in the Russian Federation only in the cases provided for by international treaties signed by the Russian Federation. Normally, this is set forth in bilateral legal assistance agreements (such agreements have been signed with all former USSR republics, Eastern European countries, Spain, Italy, and Finland). Matters related to the recognition of foreign court judgments are settled through the filing of a petition by the interested party with an arbitration court of a constituent territory of the Russian Federation, at the debtor s place of residence or the location of the debtor s property, if the judgment was issued with respect to an economic dispute. In all other cases, issues concerning the recognition of judgments of foreign courts are decided upon by the general jurisdiction courts of the Russian Federation. In the event that a judgment must be recognized in accordance with an international agreement, the court issues a ruling, on the basis of which such a judgment may be enforced. Decisions of inter-state institutions for the protection of human rights may also be enforced within the framework of enforcement proceedings Initiating Enforcement Proceedings Enforcement proceedings are initiated by a court bailiff on the basis of a writ of execution on the application of the judgment creditor (the party in whose favor the award judgment was made) or, in cases provided for by the law, other agencies and officials. In accordance with Russian Federation legislation, writs of execution must be presented for enforcement within the following deadlines: Writs of execution issued on the basis of a judicial act (including rulings of foreign courts and international commercial arbitration courts), according to the general rule, can be presented within 3 years of the entry of a judicial act into legal force; In the event that an arbitration court renews an expired term for the presentation of a writ of execution, presentation can be made within 3 months of the day on which the court announces the renewal of the expired term; Writs of execution containing requirements for periodic payments can be presented within the whole term for which the payments are awarded, as well as within 3 years of the end of this term; Judicial acts, and acts of other agencies and officials regarding cases of admin- 130

142 istrative violations, can be presented up to two years of the day of its entry into effect. Upon receipt of a writ of execution, a bailiff starts the enforcement procedure and establishes a time period for the voluntarily execution of the claim (a maximum of five days). Upon the expiration of this period, execution is performed by enforcement. In this case, the debtor bears the following expenses for the execution of the judgment: in a case of failure to execute the writ of execution within the established time period, and without reasonable cause an enforcement fee (7% of the amount claimed, but not more than 500 rubles charged to an individual debtor and 5,000 rubles charged to a corporate debtor, and for disputes related to non-property rights 500 rubles charged to an individual, and 5,000 rubles charged to a legal entity); enforcement expenses (i.e. expenses associated with locating the debtor, appraising and selling property, conducting bank transfers of claimed amounts, etc.); fines imposed by court bailiffs during the enforcement process. The law provides for a general two-month deadline for the execution of the enforcement procedure. The establishment of this deadline is primarily aimed at protecting the rights of judgment creditors. However, the law does not provide for penal sanctions for violations of this deadline. In practice, the enforcement procedure lasts much longer Enforcement Measures Enforcement may be implemented by the foreclosing of: Debtor s assets, by means of seizure and sale (including monetary and stock assets), Debtor s income (received under the auspices of labor, civil law or social legal relations), Debtor s ownership interests (including the results of intellectual activity and means of individualization). Furthermore, legislation provides for such measures of enforcement as the seizure of a debtor s certain property, as specified in the writ of execution, and the subsequent transfer of these assets from the plaintiff to the judgment creditor. It also provides for the completion of certain actions on behalf of, and at the expense of, the debtor, such as establishing the residence of the plaintiff (or eviction of the debtor) in residential premises, or the removal of non-residential premises or storage facilities from the 131

143 debtor and their property, as well as other actions provided for by federal law or writs of execution. Primarily, the debtor s monetary funds, which have been either placed in bank accounts or kept as cash in hand, are foreclosed. The judgment creditor may present the writ of execution directly to the bank, assuming that he/she is aware of the bank details and the availability of funds in the bank account, or the writ of execution may be delivered to the bailiff. The bank is obligated to debit the funds within three days of the receipt of the writ of execution, or make an entry regarding the non-availability of funds in the account. If a bank fails to execute the instructions as stated in a writ of execution, it is subject to a fine equal to 50% of the amount claimed. The debtor s property may be foreclosed only in the event of the non availability (or insufficiency) of funds in his/her account. The debtor has the right to specify the property to be initially foreclosed. The order of priority on the foreclosing of the debtor s property is determined by a court bailiff. The debtor s property is foreclosed by means of: Freezing (inventory) the debtor s property. Freezing the debtor s property includes taking inventory of their assets, imposing an injunction on the rights of disposal thereof, and, if required, restricting the right to use the property; Seizure of the debtor s property; Enforced sale of the property through a specialized institution. If the debtor is a legal entity, its assets are foreclosed in the following order: assets not directly involved in production (including stocks, finished products, and precious metals and stones); ownership interest not directly used in production; real estate objects not directly involved in production; ownership rights and assets which are involved in producing goods used directly in the production process, conducting works or providing services (objects of real estate, equipment, raw materials, other materials, etc.). If the location of the debtor or his/her property is unknown, the court bailiff service, with the judgment creditor s consent, arranges for a search to be carried out. In such cases, the judgment creditor bears the expenses incurred in connection with the search for the debtor (or the debtor s property). 132

144 8.1.4 Priority of Satisfaction of Claims Firstly, out of the amount enforced by the court bailiff from the debtor, the enforcement fee is paid, as well as the penalties charged to the debtor in the course of the enforcement procedure. Subsequently, the main amount is transferred, in order to satisfy the judgment creditors claims, and in the following order of priority: claims regarding alimony and compensation for accidental and fatal injuries; employees claims arising out of contractual relations, attorneys claims regarding legal aid rendered, and claims related to copyright payments; claims regarding payments to budgets, and contributions to state non-budgetary funds; all other claims, in the order of their receipt. Claims are satisfied in the order of their priority, i.e. each claim is satisfied only after the full satisfaction of the previous claims. If funds are insufficient for fully satisfying all claims on the same level of priority, the funds are distributed among all judgment creditors, in proportion to the respective amounts due to them. 8.2 Bankruptcy General Provisions Relations connected with the insolvency of legal entities in the Russian Federation are governed by the new Federal Law On Insolvency (Bankruptcy) No. 127-FZ, which came into force on December 3, Insolvency is understood as the debtor s inability, as recognized by an arbitration court, to fully satisfy creditors claims regarding monetary obligations, and/or to fulfill its obligations to make mandatory debt payments. A legal entity is recognized as being unable to satisfy creditors monetary claims or fulfill its mandatory payment obligations if its outstanding liabilities have not been met within three months of their due dates. The consideration of bankruptcy cases falls within the jurisdiction of the arbitration courts of the Russian Federation. Arbitration courts initiate bankruptcy proceedings against legal entities in cases where the sum of creditors claims exceeds 100,000 rubles. The right to initiate a bankruptcy petition to recognize a debtor as bankrupt lies with the debtor, the creditor, and other authorized persons, e.g. the tax authorities. When 133

145 particular indications of a debtor s insolvency become apparent, the debtor s authorized body is obligated to bring a bankruptcy petition to an arbitration court for the commencement of bankruptcy proceedings aimed at adjudicating the debtor as bankrupt, within one month of the date when the relevant circumstances occurred. In cases of fraudulent and deliberate bankruptcy, the law provides for measures that place civil and criminal responsibility with the founders and employees of legal entities Particular Types and Stages of the Bankruptcy Procedure During the consideration of bankruptcy petitions, the following main bankruptcy procedures are applied to corporate debtors: supervision; financial recovery; external management; bankruptcy proceedings; settlement agreement. As a general rule, supervision is a mandatory bankruptcy procedure preceding the initiation of any other procedures. However, it is not used in simplified procedures applied to bankruptcy cases (e.g. in a case of the bankruptcy of a debtor to be liquidated) Supervision The purposes of administering supervision are to preserve the debtor s assets, analyze the debtor s financial status, create a register of the creditors claims, and convene the first meeting of creditors. According to the general rule, the supervision procedure begins from the date of acceptance of the debtor s bankruptcy petition by an arbitration court. At this stage, the financial status and future is decided on. To implement supervision of the debtor, the arbitration court appoints a temporary manager, who is nominated in the statement on the recognition of bankruptcy, or by the standard protocol of choosing a candidate manager at a meeting of the creditors. If such a candidate has not been proposed, the manager is put forward by the selfregulating organization from a number of its members. If the self-regulating organization has not nominated its candidates, they are proposed by the state body authorized to act accordingly in the sphere of bankruptcy, upon the request of the arbitration courts. Their purpose is to control the activity of arbitration managers and their selfregulating organizations. 134

146 Introducing the supervision procedure stops the debtor from paying dividends, court proceedings on monetary fees from the debtor, implementation of a large portion of writs of execution of a real estate nature under already completed court proceedings, as well as a range of other actions regarding assets. During the period of supervision, the administrative bodies of the debtor retain their authority and continue to carry out the management of the debtor business, albeit under the control of the temporary manager. Carrying out interested-party transactions, as well as large-scale transactions connected with the acquisition or disposal (or possible disposal) of assets with a value of more than 5% of the book value of the assets of the debtor, borrowing or issuing loans, and a variety of other actions related to the disposal of the assets of the debtor, is possible only with the prior consent of the temporary manager and (or) the creditors meeting. The temporary manager adopts measures to preserve the assets of the debtor, produces a financial analysis of the status of proceedings of the debtor, notifies creditors, takes part in determining the amount of creditors claims from the debtor, and organizes and convenes the first meeting of creditors of the debtor. The first meeting of creditors is authorized to make the following decisions: introducing financial recovery and filing the appropriate petition with an arbitration court; introducing external management; applying to an arbitration court to recognize the debtor as bankrupt and on commencing bankruptcy proceedings; other decisions (concluding a settlement agreement between the creditors and the debtor, the establishment of a creditors inspection committee, etc.). On the basis of the decision adopted by the creditor s meeting and the information provided by the temporary manager, the arbitration court adopts one of the following decisions: introducing financial recovery; introducing external management; recognizing the debtor as bankrupt and commencing bankruptcy proceedings; confirming the settlement agreement and terminating the bankruptcy proceedings. 135

147 Adoption of one of these decisions by the arbitration court results in the termination of supervision, and the process moves to another bankruptcy procedure Financial Recovery Financial recovery is a procedure in Russian bankruptcy legislation which is applied to the debtor for the purpose of restoring its solvency and paying off its debts in accordance with a debt payment schedule. This procedure is not compulsory, and is carried out, as a rule, if it is expected that the claims of the creditors can be met within the defined period and without intervention in the activities of the debtor. The debtor s founders or other individuals, who are petitioning the creditors meeting to introduce said procedure, develop a financial recovery plan and debt repayment schedule, which should be approved by the general meeting of creditors. The recovery procedure is established by the arbitration court on the basis of a resolution adopted at the creditors meeting. Recovery may be introduced for a period of two years only. During the period of financial recovery, the payment of dividends by the debtor is suspended, and a large portion of writs of execution of a real estate nature are implemented, as well as a range of other actions regarding assets. The debtor s executive bodies still perform their functions, as provided for by the law. For example, the debtor must obtain the approval of the creditors meeting to conclude a loan or guarantee agreements, and to dispose or acquire property costing more than 5% of the book value of assets. The law provides for the appointment of a temporary manager who is empowered to, among other things, coordinate some of the debtor s transactions and decisions, and provide information to the creditors. In accordance with legal requirements, the final repayment of debts must take place no later than one month prior to the termination of the recovery procedure, while the payment of debts to creditors of the first and second priority must be made within six months of the introduction of the recovery procedure. The debtor may repay debts ahead of the deadlines provided by the schedule. In a case of a successful completion of recovery, the bankruptcy proceedings are terminated by the arbitration court. In a case of failure, the court can decide to introduce external management or commence bankruptcy proceedings, in accordance with a decision of the creditors meeting External Management External management is applied to the debtor with the aim of restoring its solvency, if there is a basis for supposing that solvency can indeed be restored. The management of the company is provided by an outside individual (external manager), who carries out actions aimed at ensuring the company s recovery. External management is introduced for 18 months, and in some cases this may be extended by six months. For the duration of external management, control over the debtor is exercised by the external manager, who has been appointed by the arbitra- 136

148 tion court at the creditors suggestion. The powers of the debtor s executive bodies are terminated, and a moratorium is imposed on the satisfaction of the creditors claims (subject to certain exceptions). Within the framework of executing his/her functions, the external manager may take the following steps: take control over the debtor s assets and create an inventory thereof; maintain the register of creditors claims; dispose of the debtor s assets in accordance with the external management schedule; maintain accounting, financial, and statistics records and reporting; implement the external management plan; take measures for collecting receivables due to the debtor, etc. The external manager drafts an external management schedule and presents it to the creditors meeting for their approval. Prior to the expiration of the external management period, the external manager submits a report on the results of the external management to the creditors meeting for review. Upon review of the external manager s report, the creditors meeting is authorized to take one of the following decisions, which, along with the report, must be subsequently approved by the arbitration court: terminate the external management in connection with restoration of the debtor s solvency; file a petition with an arbitration court for the extension of the external management term; file a petition with an arbitration court to adjudicate the debtor as bankrupt and commence bankruptcy proceedings; conclude a settlement agreement. The arbitration court may adjudicate the debtor as bankrupt and commence bankruptcy proceedings given that a bankruptcy petition has been submitted by the creditors meeting, or in the event that the external manager s report was rejected by the arbitration court, as well as in other cases. 137

149 External management is not a compulsory procedure, and can be left unused (if it is established that the restoration of solvency is impossible). It is worth mentioning that bankruptcy proceedings may be initiated without the prior introduction of the external management procedure where there are reasons to believe that there is no chance of restoring the debtor s solvency. In this case, once the arbitration court has adjudicated the debtor as bankrupt, bankruptcy proceedings are commenced Bankruptcy Proceedings Bankruptcy proceedings are applied to debtors who have been adjudicated as bankrupt, and are intended to proportionally satisfy creditors claims. Bankruptcy proceedings are commenced by the arbitration court either on its own initiative, or at the initiative of the creditors. It is worth mentioning that bankruptcy proceedings may be initiated without introducing the recovery and external management procedures, where there are reasons to believe that there is no chance of restoring the debtor s solvency. Bankruptcy proceedings are managed by the administrator in the bankruptcy proceedings, appointed by the arbitration court. Generally, bankruptcy proceedings last for 6 months, and may be extended by a period of a further 6 months. The date of commencement of bankruptcy proceedings is accepted as the due date in respect of all the creditors claims. The administrator in the bankruptcy takes inventory, arranges for an independent appraiser s appraisal of the debtor s property, and forms the bankrupt entity s estate. Upon completion of these steps, the administrator sells the bankrupt entity s property at open auction, or by other means as specified in the decision of the creditors meeting. The money received from selling the bankrupt entity s property is used for satisfying the creditors claims, and for making other payments related to judicial, administrative, and other expenses incurred in the course of the bankruptcy proceedings. Creditors claims are satisfied in the order of their priority, i.e. each claim is satisfied only after the full satisfaction of the previous claims. Legislation establishes the following order of priority of claims: First priority - claims of citizens before whom the debtor is held accountable for accidental or fatal injuries. These claims are satisfied through the capitalization of regular payments, as well as compensation for moral damages; Second priority - claims for severance payments and payments to individuals who work or have worked under an employment agreement, including payments concerning copyright agreements; 138

150 Third priority - other creditors claims. Creditors claims connected with obligations secured by a pledge of assets of the debtor are satisfied by the cost of the subject of pledge and prior to other creditors, with the exception of obligations to creditors of the first and second priority, in respect to which rights to claim arose before the conclusion of the corresponding pledge agreement. Creditors claims for current payments, i.e. payments that became due from the debtor after the court had accepted the petition for recognizing the debtor as bankrupt, are satisfied from the bankruptcy assets in priority to any other claims. Upon implementing payments in accordance with the creditors claims, the administrator in the bankruptcy proceedings submits a report on the outcome of the bankruptcy proceedings to the arbitration court. Based on this report, the arbitration court issues a ruling on the termination of the bankruptcy proceedings, resulting in the liquidation of the debtor legal entity Settlement Agreement One of the bankruptcy procedures is the conclusion of a settlement agreement aimed at terminating the bankruptcy proceedings. This can be performed at any stage of the proceedings, by way of reaching an agreement between the debtor and all its creditors. The decision to conclude a settlement agreement is made at the creditors meeting through a simple majority of all creditors votes. The arbitration court then approves the settlement agreement and terminates the bankruptcy proceedings. For each type of bankruptcy procedure, the law establishes individual particularities for the conclusion of settlement agreements Specific Features Regarding the Bankruptcy of Certain Categories of Debtors There are special rules concerning bankruptcy proceedings applied to certain categories of debtors, namely: town planning organizations; agricultural organizations; financial institutions (credit institutions, insurance companies, professional participants in the securities market); 139

151 strategic institutions and organizations; natural monopoly entities. 140

152 9. Banking and Finance Law 9.1 Banking Activities General Overview of the Banking System Banking activities in the Russian Federation are regulated by a number of legislative acts, including: The Federal Law On Banks and Banking Activities No dated December 2, 1990; The Federal Law On the Central Bank of the Russian Federation (Bank of Russia) No. 86-FZ dated July 10, 2002; The Federal Law On Insolvency (Bankruptcy) of Lending Institutions No. 40-FZ dated February 25, The Russian banking sector has been developing rapidly since the collapse of the Soviet Union. Russian commercial banks enjoyed a period of remarkable growth between 1995 and However, the decision of August 17, 1998, to restructure Russia s foreign debt, as well as its debt on government short-term bonds ( GKOs ), led to a near collapse of the national banking system. The financial consequences of August 17, 1998, known as the Russian financial crisis, had a profound impact on the banking system, leaving it in a much weakened state. Currently, the banking sector in Russia is developing steadily, exhibiting a trend toward a reduction in the number of banks through mergers, while the quality of banking services is improving and capital is growing. Furthermore, the standards established for Russian lending institutions by the Central Bank of the Russian Federation increasingly conform with international banking standards. Article 2 of the Federal Law On Banks and Banking Activities dated December 2, 1990, No establishes that Russia s banking system consists of the Central Bank of the Russian Federation, lending institutions, and branches and representative offices of foreign banks (i.e. institutions deemed to be banking institutions under the law of the corresponding foreign states). In accordance with the Provision On the Procedure for Opening and Operations in the Russian Federation of Representative Offices of Foreign Lending Institutions, approved by Order of the Central Bank of the Russian Federation dated No , representative offices of foreign banks may be established only for the purpose of studying the economic situation in the Russian banking sector and supporting and developing contacts with Russian lending institutions. Therefore, under Russian legislation, branches of foreign banks are formally entitled to carry out their own banking activities in Russia. 141

153 However, Announcement No. 1472p-P13 of the Government of the Russian Federation, the Central Bank of the Russian Federation No /1280 dated April 5, 2011 On Strategy for Developing the Banking Sector of the Russian Federation up to 2015 mentions that at the current stage of development of the Russian banking sector, it is impossible for foreign banks to open branches in Russia. Thus, a foreign bank may carry out activities in Russia only by registering a subsidiary lending institution. Lending institutions include banks and lending institutions not classified as banks (nonbanking lending institutions). The main distinction of non-banking lending institutions is the restriction on the types of operations they are entitled to carry out The Central Bank of the Russian Federation The Central Bank of the Russian Federation (hereinafter the CBRF ) is the primary regulatory authority for the Russian banking sector. Money can only be issued by the CBRF. Article 75 of the Constitution of the Russian Federation establishes that the CBRF s primary responsibility is to defend and guarantee the stability of the Russian ruble. The CBRF also regulates banking activities throughout the Russian Federation, as well as issuing numerous regulatory acts and explanations, which are binding on all Russian banks and non-banking lending institutions. As part of its general oversight role, the CBRF issues licenses for banking operations, establishes the minimum charter capital amount and net worth requirements for lending institutions, and approves senior management appointments at all banks (including foreign bank branches). Traditionally, the state has significant influence on the banking system. There are several Russian banks in which the Russian Federation holds the main block of shares. The largest state-owned Russian bank is Sberbank, which has a large regional network of branches and leads the market for banking services. The CBRF belongs to the institutions subordinate to the legislative (not the executive) branch of government. The State Duma of the Federal Assembly of the Russian Federation is authorized to appoint not only the Chairman of the CBRF, but also the members of the Board of Directors of the CBRF. The Federal Law On the Central Bank of the Russian Federation (Bank of Russia) provides for the establishment of a special collective body within the structure of the CBRF the so-called National Banking Council (hereinafter the NBC ) which is comprised of representatives of various branches of government. The NBC is called upon to participate in forming the main directions of Russian monetary policy and improving the banking system of the Russian Federation Licensing All Russian banks are required to obtain a license from the CBRF prior to commencing their operations. As a general rule, newly established banks may obtain: 142

154 a license to carry out banking activities with funds in rubles (without the right to deposit an individuals funds); a license to carry out banking activities with funds in rubles and foreign currency (without the right to deposit an individuals funds); a license to deposit and accommodate precious metals. A bank registered for no less than two years may expand its operations by obtaining: a license to deposit an individuals funds in rubles; a license to deposit an individuals funds in rubles and foreign currency. A bank holding all of the abovementioned licenses (with the exception of a license to deposit and accommodate precious metals), and complying with all CBRF requirements for the amount of its own capital, is entitled to obtain a general license, which includes the right to carry out all the above mentioned types of banking operations. It should be noted that the right to deposit an individual s funds may also be granted to a newly registered bank or a bank that has been registered for less than two years, given compliance with several conditions established by law, in particular, the conditions regarding the disclosure of information and the amount of charter capital Transition to International Banking Standards Transition to international banking standards was stipulated by the Russian Government in the Strategy for Developing the Banking Sector of the Russian Federation approved on December 30, In order to implement the Strategy and attain its goal, the CBRF issued the Official Notice on the Transition of the Russian Federation Banking Sector to International Accounting Standards dated June 2, According to the Notice, as of January 1, 2004, all Russian lending institutions must prepare their financial reports in compliance with the international banking standards on the basis of Russian accounting reports, with application of the transformation method. The guidelines On the Procedure for Preparation and Submission by Lending Institutions of Financial Reports set forth in the Letter of the Bank of Russia No. 169-T dated November 24, 2011 are prepared in accordance with the International Financial Reporting Standards and IFRS Interpretations that are understood as the International Financial Reporting Standards (IFRS) and the International Accounting Standards (IAS) and the Interpretations issued by the IFRS Interpretations Committee (IFRIC) and the Standing Interpretations Committee (SIC) that operated previously. 143

155 9.1.5 Requirements for Russian Banks The minimum charter capital and equity capital (capital) amount for banks is established by the Federal Law On Banks and Banking Activities and is equal to RUB 300 million (approximately EUR 7.5 million). Moreover, the CBRF has maintained the option that establishes the maximum size of asset (in-kind) contributions to the charter capital of a lending institution, the list of types of in-kind assets that may be contributed to the charter capital, as well as requirements concerning the minimum amount of reserves (funds) of Russian banks. Special requirements are also established for candidates for executive positions in banks. A bank s prospective head and chief accountant must have at least two years of experience heading a department or a subdivision of a lending institution. Candidates with a university degree in law or economics are required to have at least one year of management experience. Candidates may not be appointed as head or chief accountant of a bank if they have a criminal record for economic crimes, or have been held administratively liable for trade and financial offences, or on other grounds established by Russian Federation legislation Banks with Foreign Participation The Civil Code of the Russian Federation provides for the possibility of foreign banks opening branches in the Russian Federation. Articles 17 and 18 of the Federal Law On Banks and Banking Activities also generally provide for the possibility of investment from foreign banks in Russian banks. However, it should be noted that the activities of foreign investors in the Russian market for banking services are subject to certain restrictions, which are described in greater detail in Section General Overview of the Banking Szstem Specialized Mortgage or Construction Savings Banks Russian banking law does not contain any special provisions concerning banks primarily engaged in mortgage activities, i.e. concerning mortgage and construction savings banks. Consequently, banks dealing with real estate financing are subject to the same general legal requirements of the Russian Federation that are applicable to all banks. At the same time, the CBRF stipulates the preparation of reports and the formation of reserves for loans secured by mortgage or automobile loans Non-Banking Activities of Banks Pursuant to Article 5 of the Federal Law On Banks and Banking Activities, Russian banks are allowed to engage in the following types of non-banking activities: providing financial guarantees to third parties; 144

156 acquiring rights of claim in a monetary form from third parties; managing the property and finances of legal entities and individuals as a trustee; participating in transactions involving precious metals and precious stones; leasing special premises or safes (safety deposit boxes) within such premises for storing documents and other valuables; carrying out leasing operations; providing consulting and informational services Money Laundering Legislation Based on recommendations concerning the problem of money laundering made by the Financial Action Task Force on Money Laundering (FATF), an inter-governmental body with the goal of developing and supporting policies of national legal systems for combating money laundering, the Federal Law On Combating the Legalization (Laundering) of Income Obtained in Criminal Ways and the Financing of Terrorism dated August 7, 2001, No. 115-FZ (hereinafter the Money Laundering Law ) was adopted. The Money Laundering Law requires banks to inform the Federal Service for Financial Monitoring (Rosfinmonitoring) of all transactions meeting the set of criteria established by Article 6 of the Money Laundering Law. One such obligatory criterion is the amount of a bank transaction: 3 million rubles in transactions concerning real estate and 600,000 rubles in other transactions. The Money Laundering Law establishes requirements for the supervision of information provision regarding suspicious transactions, as well as on internal record-keeping and customer identification procedures for banks, financial institutions not classified as banks, securities market professionals, insurance and leasing companies, and postal and other non-lending institutions that deal with financial transfers. The rules governing the internal record-keeping of financial institutions and the reporting of suspicious transactions include the obligation to perform an expert evaluation of all complex or unusual transactions that have an insufficiently clear economic and legal basis. Financial institutions are protected from any liability for a breach of any restriction on the disclosure of information in connection with fulfilling the requirements of the Money Laundering Law. Financial institutions must establish the identity of their customers and are not allowed to open or maintain anonymous accounts. Russian banks that fail to comply with the requirements of the Money Laundering Law on more than one occasion within one year will have their licenses revoked. 145

157 Deposit Insurance The concept of deposit insurance in Russia was formulated in the Federal Law On Insurance of Individuals Deposits in Banks of the Russian Federation dated December 23, 2003, No. 177-FZ (hereinafter the Deposit Insurance Law ). The Deposit Insurance Law establishes the legal, financial, and organizational bases for the functioning of the system of mandatory insurance of individuals deposits, the authority, procedure for forming, and the activities of the organization performing mandatory deposit insurance functions (the Deposit Insurance Agency), as well as establishing the deposit reimbursement procedure. The deposit insurance system does not require depositors to sign an insurance contract. Each deposit (i.e. a sum of money in foreign or Russian currency placed by an individual in a bank in the Russian Federation under a bank deposit or bank account agreement, as well as the interest accrued on the deposited amount) made by an individual at a bank participating in the deposit insurance system shall be insured. However, the Deposit Insurance Law does not cover the following monetary funds: money deposited in bank accounts of individual entrepreneurs who do not have the status of a legal entity, provided that such accounts were opened in connection with entrepreneurial activities; money placed as bank deposits payable to a bearer, including those certified by a savings certificate and/or a bearer s savings book; money transferred by individuals to banks for trust management; money placed as bank deposits in foreign branches of Russian banks; electronic money (so called electronic wallets ). A depositor s right of claim for deposit compensation arises as of the date of occurrence of an insured event. The following are considered insured events: revocation (annulment) by the CBRF of a bank s license to conduct banking activities in accordance with the Federal Law On Banks and Banking Activities ; imposition by the CBRF of a moratorium on the settlement of claims of creditors of a bank in accordance with Russian law. In a case of an insured event, deposit compensation is paid to a depositor to the amount of 100% of the sum of deposits at the bank, up to 700,000 rubles. If an insured event has taken place in several banks at which a depositor has deposits, the amount of insurance compensation is calculated separately for each bank. 146

158 The registration of a bank within the deposit insurance system is carried out by the Deposit Insurance Agency, by entering the bank in the register of banks, on the basis of notification from the CBRF regarding the issue to the bank of a CBRF license. Banks already entered in this register are obligated to comply with the requirements established for participants of the deposit insurance system. A bank having the CBRF s permission, valid on the effective date of the Deposit Insurance Law, is deemed to be in compliance with the requirements for participation in the deposit insurance system, provided such a bank meets the particular criteria outlined in the Deposit Insurance Law. Under the Deposit Insurance Law, banks that do not participate in the deposit insurance system will be denied the right to both receive deposits from individuals and to credit additional funds to accounts held by individuals under existing bank account or bank deposit agreements. Federal Law No. 40-FZ dated February 25, 1999 On Insolvency (Bankruptcy) of Lending Institutions establishes that in the event of their liquidation, banks and lending institutions that accept funds from individuals must, as a first priority, settle not only the claims made by individual creditors of such banks or lending institutions, but also the claims made by the Deposit Insurance Agency for insurance payments on deposits pursuant to the Deposit Insurance Law Credit History Bureaus The Federal Law On Credit Histories No. 218-FZ dated December 30, 2004, is valid in Russia (hereinafter the Law on Credit Histories ). It is intended to facilitate the further development of the market, mainly in consumer and mortgage lending, which is becoming increasingly common practice with each passing year. Pursuant to the Law on Credit Histories, on June 1, 2005, credit history bureaus, collecting and forming information on credit issued to individuals and legal entities, subject to their prior consent, began to operate in the Russian Federation. This information includes, among other items, data regarding amounts of credit, and its repayment or non-repayment by debtors. It is expected that this will result in a reduction in risks of unpaid credit, and an increase in the amount of credit issued, and therefore also in the further development of the lending sector. Lending institutions are the direct source for the formation of a credit history. Lending institutions are obligated to provide information on credit with respect to all borrowers - that have given their consent - to at least one credit history bureau included in the state register of credit history bureaus. For these purposes, an agreement for the provision of informational services must be concluded between a lending institution and a bureau. Pursuant to the Law on Credit Histories, several credit history bureaus may be established, as is the case in, for example, Germany. This step is aimed at preventing 147

159 a monopoly by major banks. However, the Central Catalogue of Credit Histories is formed by the CBRF. The activities of credit history bureaus are subject to control by the Federal Service for Financial Markets. Its powers include maintaining the register of credit history bureaus, establishing requirements for the financial condition and business reputation of participants of credit history bureaus, as well as applying other control measures. Given certain conditions, the Federal Service for Financial Markets may petition a court for the exclusion of a bureau from the register of credit history bureaus. 9.2 Currency Regulation General Overview Pursuant to Article 140 of the Civil Code of the Russian Federation, the ruble is the national currency of the Russian Federation. As a general rule, all transactions inside the Russian Federation must be conducted in rubles. Moreover, agreements entered into by and between Russian parties may refer to the ruble equivalent of an amount expressed in a foreign currency. The cases, procedure and conditions for the use of foreign currency in the Russian Federation are determined by law or in accordance with the procedure established thereby. The legislation on currency control determines the types of assets recognized as currency valuables, and the procedure for transactions therewith. The ownership right to currency valuables is protected in the Russian Federation on general grounds. For the purpose of defending the national currency and preventing illegal capital exports from the country, legislation exists in the Russian Federation that specifically regulates operations conducted in foreign currencies. The main legislative act in this area is the Federal Law On Currency Regulation and Currency Control No. 173-FZ dated December 10, 2006 (hereinafter the Law on Currency Regulation ). An important role is also played by regulatory acts of the Central Bank of the Russian Federation, which is the main authority for currency regulation in Russia. In recent years Russian currency legislation has undergone significant changes, due to the overall liberalization of the Russian economy as well as the intention of the Government of the Russian Federation to ensure the necessary conditions for a freely convertible ruble. In total, the changes in the currency legislation of the Russian Federation have provided for a reduction in administrative barriers and a limitation of state authorities interference in the business activities of both Russian and foreign companies. At the same time, if it is compared to legislation of the member states of the European Union and the USA, Russian currency regulation is characterized by the significant number of documents that must be submitted. Any breach of the procedure for the preparation and submission of such documents results in substantial administrative sanctions. 148

160 9.2.2 Currency Operations Currency operations include operations connected with transferring the title and other rights to Russian and foreign currencies and securities, as well as their movement across the border of the Russian Federation or their use as means of payment. For currency regulation purposes, Russian Federation legislation divides all participants in currency operations, in terms of their legal status, into residents and nonresidents. Residents, in particular, include citizens of the Russian Federation (except those permanently residing in foreign countries), foreign citizens residing in the Russian Federation on the basis of a residence permit, Russian legal entities and both their branches and representative offices outside the Russian Federation. Non-residents are, in particular, foreign citizens (except for those permanently residing in Russia on the basis of a residence permit), foreign legal entities as well as both their branches and representative offices in the Russian Federation. Currency transactions between residents and non-residents are conducted freely, and without any restriction, subject to the established requirements regarding the provision of information on such transactions by residents to the authorized currency control bodies. Currency transactions between residents are prohibited, with the exception of the cases provided for by the Law on Currency Regulation. Such exceptions include, in particular: transactions between commission agents (agents, proxies) and principals while providing services related to the conclusion and performance of agreements with non-residents; transactions under freight forwarding agreements, shipping and chartering contracts during the provision of services related to the carriage of cargo imported to or exported from the Russian Federation, cargo transit traffic in the Russian Federation, as well as under insurance agreements in respect of said cargo; transactions involving securities issued outside the Russian Federation that are conducted through organizers of trading on the Russian securities market (through organized trading), provided the rights to such securities are registered in depositories established in compliance with Russian Federation legislation; transactions involving securities issued outside the Russian Federation, provided that the rights to such securities are registered in depositories established in compliance with Russian Federation legislation and that the payments are made in the currency of the Russian Federation; 149

161 transactions related to payments under securities issued outside the Russian Federation, with the exception of promissory notes; transactions connected with effecting mandatory payments in foreign currency in accordance with Russian legislation. Currency transactions between non-residents are conducted freely. In particular, nonresidents are entitled to transfer foreign currency, without limitations, to accounts opened in Russian banks, or to transfer foreign currency from accounts opened in Russian banks to those opened outside the Russian Federation. Non-residents are entitled to transfer among themselves, in Russia, without limitation, foreign currency and the currency of the Russian Federation without opening bank accounts in Russia, and to receive, in Russia, remittances in foreign currency and the currency of the Russian Federation without opening bank accounts. Also, non-residents have the right to freely conduct transactions involving securities issued in the Russian Federation, provided Russian antimonopoly legislation and securities market legislation are observed. Currency transactions in rubles between non-residents in the Russian Federation are conducted via bank accounts opened in the Russian Federation. Sales and purchases in the Russian Federation of foreign currency and checks (including traveler s checks), whose nominal value is stated in a foreign currency, are performed only via authorized banks, i.e. Russian banks and branches of foreign banks entitled, on the basis of a license of the Central Bank of the Russian Federation, to carry out banking transactions with funds in a foreign currency Bank Accounts of Non-Residents Non-residents are entitled to open bank accounts (bank deposits) in Russian and foreign currencies in the Russian Federation in authorized banks only, which, in accordance with Russian Federation law, and as a general rule, are lending institutions established under Russian law and which have the right to perform banking operations with funds in foreign currency on the basis of a license issued by the Central Bank of the Russian Federation. The procedure for opening and maintaining non-residents bank accounts (bank deposits) opened in the Russian Federation is established by the Central Bank of the Russian Federation. Non-residents are entitled, without limitation, to transfer foreign and Russian currency from their bank accounts (bank deposits) in banks outside the Russian Federation to their bank accounts (bank deposits) at authorized banks. Non-residents are also entitled, without limitation, to transfer foreign currency from their bank accounts (bank deposits) in authorized banks to their accounts (deposits) in banks outside the Russian Federation. 150

162 9.2.4 Repatriation of Earnings The Law on Currency Regulation establishes that during the performance of foreign trade activities, within the terms stipulated by foreign trade agreements (contracts), residents must ensure: that the foreign or Russian currency owed in accordance with said agreements (contracts) regarding products transferred to non-residents, the works performed for them, the services rendered to them, or the information and results of intellectual activities, including exclusive rights thereto, transferred to them, is received from said non-residents in their bank accounts at authorized banks; that the funds paid to non-residents for products not imported to the Russian Federation (not received in the customs territory of the Russian Federation), works not performed, services not rendered, or information and results of intellectual activities, including exclusive rights thereto, not transferred, are returned to the Russian Federation. In this regard, as it is not possible to affirm the actual performance of the provisions of an agreement (contract) by a third party, the general rule on the admissibility of the performance of an obligation by a third party stipulated by the Civil Code of the Russian Federation cannot be applied to obligations to pay foreign currency due to residents in the cases listed above. This restriction also applies to the offset of counterclaims Residents Reports on Currency Transactions To ensure the recording of and reporting on currency transactions, residents are obliged to provide the authorized bank with a so-called transaction passport. A transaction passport is a document containing the data required for a record of currency transactions conducted under a particular agreement (contract). In particular, it must contain such information regarding the agreement (contract) as the term of the agreement, the price of the agreement, the currency of the price and payment currency, the counterparty s name and country of incorporation, the terms and conditions of payment, delivery, and rendering of services. A transaction passport shall be executed with respect to agreements (contracts) stipulating the import of goods to, and export of goods from, Russia, the performance of works and the rendering of services, as well as loan agreements between residents and non-residents. A transaction passport shall not be executed if: the total amount of a loan agreement does not exceed the equivalent of USD 5,000, at the official rate of the foreign currency to the ruble, established by the Bank of Russia at the date of the conclusion of the respective loan agreement. Or, in the case of a change to the amount of the loan agreement, at the date of the formation of the last amendments (addenda) to the loan agreement stipulating such amendments; 151

163 the total amount of a contract does not exceed the equivalent of USD 50,000 at the official rate of the foreign currency to the ruble established by the Bank of Russia at the date of the conclusion of the respective agreement (contract). Or, in the case of a change to the amount of the agreement, at the date of the formation of the last amendments (addenda) to the agreement (contract) stipulating such amendments. To formulate a transaction passport, a resident shall submit a copy of the agreement (contract) or loan agreement, in addition to a filled-in transaction passport, to the authorized bank. When a currency transaction in a foreign currency is conducted by residents, they are obligated to provide the authorized bank with an ID statement in accordance with currency transaction types, with respect to monetary funds in a foreign currency credited, to or debited from, the resident s bank account, which has been opened with the authorized bank. The form of, and procedure for, the execution of an ID statement are set forth in the Instruction of the Bank of Russia dated June 15, 2004 No.117-I On the Procedure for Submission to Authorized Banks by Residents and Non-Residents of Documents and Information When Conducting Currency Transactions, the Procedure for the Record of Currency Transactions and Execution of Transaction Passports by Authorized Banks (currency control form). Moreover, residents are obligated to provide the bank with documents serving as the basis for a currency transaction (e.g. deeds, invoices). A currency control form must be formulated by a resident, whether there is a transaction passport or not. In addition to a currency control form, a resident conducting currency transactions within the framework of settlements with a non-resident for goods exported from the customs territory of the Russian Federation, or imported to the customs territory of the Russian Federation, as well as for works performed, services rendered, information and intellectual property results transferred, including exclusive rights thereto, under a foreign trade agreement (contract), shall be obligated to provide the authorized bank with a statement on supporting documents if the total amount of the respective contract exceeds the equivalent of USD 50,000 at the official rate of the foreign currency to the ruble established by the Bank of Russia. This must be done on the date of the conclusion of the respective contract or, in a case of a change to the amount of the contract, on the date of the formulation of the last amendments (addenda) to the contract stipulating such amendments. Legislation establishes a deadline for the formulation of a transaction passport, currency control form, statement on supporting documents and copies of documents to be submitted to the authorized bank. In a case of undue fulfillment of the obligation to submit said documents to the authorized bank, a fine of RUB 40,000 to 50,000 may be imposed on the resident company. 152

164 9.3 Securities Legislation The securities market and transactions involving securities in Russia are regulated by the Federal Law On the Securities Market No. 39-FZ dated April 22, 1996 (hereinafter the Law on the Securities Market ). Sales of securities are also regulated by the Federal Law On Joint Stock Companies No. 208-FZ dated December 26, Only open joint stock companies may issue publicly traded shares. Issues concerning Russian securities are also governed by regulatory documents of the Federal Service for Financial Markets (formerly the Federal Commission for the Securities Market) and other state authorities. The list of the securities that may be issued by legal entities, other than joint stock companies, is determined by the Civil Code of the Russian Federation and the Law on the Securities Market. In particular, in accordance with Article 143 of the Civil Code of the Russian Federation, securities include promissory notes, checks, bonds, deposit and saving certificates, bills of lading, and securities issued during the process of privatization Regulation of the Securities Market The Federal Service for Financial Markets (hereinafter the FSFM ) is the primary regulator of the Russian securities market. The FSFM s main powers to regulate the securities market include: approving standards for securities issues, issuers securities prospectuses, including those of foreign issuers that issue securities in the Russian Federation, as well as the procedure for state registration of securities issues, state registration of reports on the results of securities issues, and the registration of securities prospectuses; establishing requirements for the rules for the performance of professional activities with securities; approving regulations for admitting securities to be publicly placed, circulated, quoted and listed; payment and depositary activities; establishing the procedure for admitting securities issued by Russian issuers to be initially placed and circulated outside the Russian Federation; licensing the activities of professional participants in the securities market; granting permits for the acquisition of the status of self-regulatory organizations of 153

165 professional participants in the securities market; registering issues of equity securities, reports on securities issue results, securities prospectuses. The FSFM has the authority to take measures against professional securities market participants that violate the legislation regulating the securities market. These measures include canceling licenses, carrying out enforcement procedures, and initiating criminal cases. In addition, the FSFM has the power to fine legal entities and individual entrepreneurs for securities violations Shares and Corporate Bonds The procedure for issuing shares, issuer options and bonds of legal entities, and the procedure for registering the prospectuses for said securities, are regulated by the Standards for the Issue of Securities and Registration of Securities Prospectuses, approved by Decree of the FSFM dated January 25, 2007, No. 07-4/pz-n. In particular, the Standards determine the general procedure for issuing shares, bonds and issuer options, the features of share issues during the foundation of a joint stock company, issues of additional shares of a joint stock company, issues of shares to be placed by means of conversion during changes in the nominal value, changes in rights, consolidation and division, and the features of issuing mortgage-backed bonds. This document also determines the procedure for issuing securities in the course of the reorganization of legal entities and establishes the features of bond issues of international financial organizations. The features of the issue and circulation of securities of credit organizations are established by the Instructions of the Central Bank of the Russian Federation On the Rules for the Issue and Registration of Securities by Credit Organizations on the Territory of the Russian Federation No. 128-I dated March 10, The Law on the Securities Market establishes the regulatory framework for the issue and circulation of secured bonds. Among other things, the law permits bonds to be secured by a pledge of property, pledge of real estate, surety, bank guarantee, and government and municipal guarantees. The conditions of the security must be established: in the decision to issue the bonds; in the issue prospectus; on the actual bond certificate (in the case of issuing documentary bonds). Unsecured bonds may only be issued by companies that have been in existence for at least three years and who were founded as joint stock companies, including lend- 154

166 ing institutions. The Federal Law On Joint Stock Companies specifies that the par value of all unsecured bonds issued by a company must not exceed the amount of the company s charter capital, and that no bonds of a joint stock company may be issued until its charter capital is fully paid up. The Law on the Securities Market also regulates the features of the issue and circulation of exchange-traded bonds. Exchange-traded bonds are bonds issued by economic entities, state corporations and international financial institutions, whose shares and/or bonds are listed by a stock exchange and are placed by means of public subscription in trading on a stock exchange. The Law on the Securities Market provides for a simplified procedure for issuing and placing exchange-traded bonds that allows issuers, who have already proven their reliability on the securities exchange, to borrow with the help of exchange-traded bonds on shorter and, consequently, more convenient terms Depositary Receipts Russian legislation provides for a type of security known as Russian depositary receipts (RDR). Pursuant to the Law on the Securities Market, they are understood to be a registered equity security, not having a nominal value, and certifying the title to a particular number of shares or bonds of a foreign issuer (provided securities). Moreover, Article 16 of the Law on the Securities Market provides for the possibility of Russian issuers placing securities outside the Russian Federation, including by way of placing, in accordance with foreign law, securities of foreign issuers certifying a right in relation to issued securities of Russian issuers (so-called ADR American depositary receipts, or GDR global depositary receipts). The placement of this type of securities is allowed only with the permission of the FSFM. The procedure for granting permission is established by the Provision approved by Decree of the FSFM No /pz-n dated June 10, The Provision, in particular, provides that during the placement of shares outside the Russian Federation, the Russian issuer is obligated to offer the possibility of the acquisition of said shares in the Russian Federation as well. 9.4 Investment Funds The activities of investment funds in Russia are regulated by the Federal Law On Investment Funds No. 156-FZ dated November 29, 2001 (hereinafter the Law on Investment Funds ), and by regulatory acts of the Federal Service for Financial Markets. The Law on Investment Funds distinguishes two types of investment funds: unit investment funds and joint stock investment funds Unit Investment Funds A unit investment fund is not a legal entity, but rather a special property complex, 155

167 formed from investors property, that has been transferred to a management company for trust management. The management company acquires securities and other assets at the expense of the investors contributed funds. To secure the investors funds, the assets constituting a unit investment fund are separated from the assets of the management company of the respective fund. Such assets are recorded by the management company on a separate balance sheet and are subject to separate accounting. All the unit investment fund s securities are registered by a special organization a specialized depository, which not only keeps securities (unless regulatory legal acts establish otherwise) but also controls all transactions with the funds of the unit investment fund. The investors rights to a share of the property in the unit investment fund are recorded in a register maintained by a specialized company a registrar or a specialized depositary. The accuracy of the records and reports of the management company is verified by an auditor. The above companies, as well as the independent appraiser and the agents responsible for placing and buying out shares, are selected directly by the management company. Each of the organizations participating in the unit investment fund s activities holds a respective license and bears liability, stipulated by the law, for violations in the course of the activities which have caused losses to the investors. The Federal Service for Financial Markets conducts regular inspections of management companies and specialized depositaries. Depending on the repayment time of the shares and funds thereunder, unit investment funds are divided into three types: open, interval and closed. The full name of a unit investment fund includes an indication of the priority directions of the fund s investments. At present, the following funds operate in Russia: equity funds, bond funds, blend funds (when funds are invested in both stocks and bonds), real estate funds, money market funds and, established relatively recently, venture funds (i.e. high-risk, prospective), and others. The rules for the trust management of a unit investment fund may provide for the possibility of exchanging shares of one unit investment fund for shares of another unit investment fund managed by the same management company. The fixed price of shares is determined by the management company when creating the fund. Upon creation of the fund, the real value of the shares depends on the value of the fund s net assets. 156

168 9.4.2 Joint Stock Investment Funds Unlike unit investment funds, joint stock investment funds are legal entities under Russian law. Provisions of the Federal Law On Joint Stock Companies apply thereto, considering the features established by the Law on Investment Funds. Joint stock investment funds perform investment activities in the organizational form of an open joint stock company, and are not entitled to place shares through a private offering. The property of a joint stock investment fund designated for investing must be transferred to a management company for trust management. A joint stock investment fund may engage in investment activities only after having received a license from the Federal Service for Financial Markets. These types of funds are prohibited from pursuing any other business activities. The minimum amount of equity capital of a joint stock investment fund, on the date of submission of the documents for obtaining a license, is established by legislation Management Company of an Investment Fund A management company is established as a commercial organization in the form of a joint stock company or a limited liability company. The Russian Federation, constituent territories of the Russian Federation and municipalities are not entitled to hold shares in a management company s charter capital. A management company must obtain a license from the Federal Service for Financial Markets prior to the start of investment activities. Minimum equity capital requirements are established for management companies. A management company has the right to manage the property of several investment funds (an unlimited number). In accordance with the trust agreement, the property of an investment fund can be invested in real estate, bank deposits, and other assets, according to the procedure established by the Federal Service for Financial Markets. A management company is liable, to the extent of all its property, for losses caused by wrongful acts. Investors are not liable for the obligations of the management company, but they do bear risks in the event of losses caused in connection with the management of the investment fund s property, to the amount of their shares in the investment fund Specialized Depositories for Investment Funds The first depositories for unit investment funds were created in May Most specialized depositories currently operating in the Russian securities market work exclusively with non-state pension funds. Only a few companies act as specialized depositories for investment funds. Only a joint stock company or a limited (additional) liability company established under 157

169 Russian law and holding two licenses a license to perform activities of specialized depositories of investment funds and unit investment funds, and a license to perform depositary activities in the securities market may function as a specialized depository of a joint stock investment fund or a unit investment fund. The main functions of specialized depositories include: keeping an account for recording the rights to securities held by a joint stock investment fund, or the rights to securities comprising the property of a unit investment fund, with the exception of the rights to state securities; keeping a separate account, as well as separate accounting reports, in relation to the property of each unit investment fund; controlling transfers (sales) of unit investment fund property in conformity with the fund s rules and provisions; facilitating timely calculations and returns of funds to investors requesting that their investment fund shares be redeemed. One of the most important functions of specialized depositories is the monitoring of management companies observance of the Russian legislation regulating the activities of investment funds. Specialized depositories are also required to inform the Federal Service for Financial Markets of any violations found of the applicable Russian laws by management companies within three days of the date they are discovered. Specialized depositories also bear liability for the maintenance of records and the safety of the property of an investment fund Investment Fund Shares An investment fund share is a non-documentary registered security, certifying the owner s share in the title to the property comprising the investment fund, and confirming the investor s right of claim for redemption of the investment fund share and receipt of cash, to the amount calculated, on the basis of the value of the property of the investment fund on the date of payment. Each investment fund share grants equal rights to owners thereof. The investment fund share issue prospectus must be registered with the Federal Service for Financial Markets. Registration and publication of the investment fund share issue prospectus is carried out by the management company. 158

170 10. Protection of Intellectual Property 10.1 General Information on the Legal Regulation of Intellectual Property Regulation of Intellectual Property in Russia The institution of intellectual property in Russia is governed by Part 4 of the Civil Code of the Russian Federation (hereinafter, the Civil Code ), which entered into force on January 1, 2008, replacing a multitude of specialized laws and subordinate legislation. The adoption of Part 4 of the Civil Code has made it possible to incorporate intellectual property rights into the general system of civil rights, systematize relationships with respect to commerce in intellectual property, and thereby increase its importance for business relationships. Particular procedures connected with the registration of certain intellectual property items are regulated by local acts adopted by authorized bodies, including the Federal Service for Intellectual Property (hereinafter the Rospatent ). Moreover, the Russian Federation is a party to principal international treaties on intellectual property matters, including the Convention for the Protection of Industrial Property, the Agreement Concerning the International Registration of Marks, the Universal Copyright Convention, the Berne Convention for the Protection of Literary and Artistic Works, and the Convention for the Protection of Interests of Producers of Phonograms Against Unauthorized Duplication of Their Phonograms, that enable foreign copyright holders to effectively protect intellectual activity results owned thereby in Russia Brief Overview of Types of Protected Objects One of the classifications of protected intellectual properties adopted in Russia is as follows: the exclusive right as a property right; personal non-property rights; other rights (royalties, right of access, etc.). Part 4 of the Civil Code uses the following classification of intellectual properties and equivalent means of individualization: 159

171 copyright (literary, scientific, and artistic works, including computer programs and databases); rights related to copyright (performance rights, recording rights, on-air and cable broadcast rights, rights of a database producer, publisher s rights to a scientific, literary, or artistic work); patent rights (patents for inventions, industrial designs, and utility models); rights to the results of selective breeding; rights to semiconductor topographies; rights to a production secret (know-how); rights to means of individualization of participants in legal entities, goods, works, services, and enterprises (corporate names, trademarks, denominations of the origin of goods, brands); rights to use intellectual properties as part of an integrated process. The most important properties for potential investors that are protected by the updated Russian IP law are considered below Trademarks and Service Marks Definition Every participant in a competitive market is undoubtedly interested in the consumer s ability to easily distinguish between its products (services) and the products (services) of other manufacturers, and in the consumer forming an opinion on the high quality and other advantages of its products in particular. For these purposes, businesspeople use original symbols for their goods and services, provided they meet certain criteria and may be legally protected as trademarks and service marks (hereinafter trademarks ). Part 4 of the Civil Code defines a trademark as a symbol serving to individualize the goods of legal entities or individual entrepreneurs and a service mark as a symbol serving to individualize the works performed by legal entities or individual entrepreneurs, or the services rendered by them. From the definitions provided, it follows that only legal entities and individual entrepreneurs may be the owners of trademarks (service marks) in Russia Types of Trademarks Trademarks, depending on the elements comprising them, are divided into the fol- 160

172 lowing types: verbal single words or phrases, with the font in which the mark is written also being protected (if it is original); figurative marks in the form of pictures, symbols, ornaments, images of tangible objects, logos (graphical symbols of words), etc. Marks may be depicted in any color or color combination; shape three-dimensional symbols (having length, height, and width) made from any materials. For example, it may be a symbol of a certain shape, or a type of package in which a certain product is sold (e.g., distinctive bottles for alcoholic beverages), or distinctively shaped goods (e.g., the shape of a bar of soap or chocolate). At the same time, the distinctiveness of the shape should derive from an original design, rather than the functional purpose of the product; combined marks comprising elements of different types of trademarks. This list of types of trademarks is not exhaustive and allows for the existence of other types of trademarks, provided they meet the criteria for registration provided by law Origin of Rights, Scope of Protection, and Protected Rights Origin of Rights to a Trademark Legal protection of a trademark in the Russian Federation is provided on the basis of its state registration, in accordance with the procedure established by law or under international treaties to which the Russian Federation is party. In the Russian Federation, the registration of symbols as trademarks is performed by Rospatent. As a rule, protection is granted to a trademark from the date of submission of an application to Rospatent. However, in cases provided for by international treaties to which the Russian Federation is party, protection of a trademark in Russia may also extend back to the submission of an application abroad (priority date). Trademarks are registered on the basis of a written application from an interested party or its authorized representative (patent attorney). The application for registration of a symbol as a trademark is prepared according to the rules established by Rospatent. It should be noted that foreign legal entities and individuals permanently residing outside the Russian Federation, and their patent attorneys, may conduct other business with Rospatent only with the assistance of a patent attorney registered in accordance with the laws of the Russian Federation. The registration of a symbol as a trademark is subject to a state fee, the amount of 161

173 which depends on the number of goods and service classes for which the trademark registration is being sought. In practice, the registration of a trademark currently takes at least ten to twelve months from the date on which the required documents are submitted to Rospatent Requirements for Symbols Not all symbols may be registered as trademarks. The criteria for registration of a symbol as a trademark are: distinctiveness; and novelty. Only a symbol with distinctiveness, that is, one that is capable of performing the principal function of a trademark the identification of products (services) among competitors may be registered as a trademark. Distinctiveness is determined based on the symbol s features of individuality. The novelty requirement means that trademark registration is not permitted for symbols that are identical or confusingly similar to existing means of individualization in Russia: another party s trademark (including a well-known trademark or an application for a trademark) that is protected in relation to homogeneous goods; a denomination of the origin of goods; another party s corporate name (its separate elements) in relation to homogeneous goods; another party s brand (its separate elements) in relation to homogeneous goods; the name of another party s results of selective breeding in relation to homogeneous goods, as well as symbols that are identical to the name of a scientific, literary, or artistic work, a character or quotation from such a work, or a work of art or a fragment thereof that is known in Russia, on the date of submission of the application, without the right holder s consent; the name, pseudonym or derivation thereof, portrait, or replica of a person who is known in Russia, on the date of submission of the application, without the consent 162

174 of such a person or his/her heir; an industrial design, conformity mark or domain name, the rights to which arose prior to the priority date of the trademark to be registered. In addition to these criteria, a number of grounds for refusing to register a trademark have been established: the symbol being applied for consists only of elements that are generally used as symbols for products of a specific type (e.g., nylon, aspirin); that are generally accepted symbols and terms; that characterize products, including by indicating their type, quality, quantity, attribute, purpose, or value, as well as the time, place, and means of their production or sale; that represent a product shape that derives exclusively or mainly from an attribute or the purpose of the products; the symbol being applied for consists only of elements representing state emblems, flags, and other state symbols and signs; the abbreviated or full names of international and intergovernmental organizations, their emblems, flags, other symbols, and signs; official marks of control or guarantee, or hallmarks, seals, awards, and other marks of distinction; the symbol being applied for contains elements that are erroneous or capable of misleading the consumer as to the product or its manufacturer, contradicting public interest or humane or moral principles; the symbol being applied for is identical or confusingly similar to official names and depictions of valuable cultural heritage sites of the people of the Russian Federation, or world cultural or natural heritage sites, as well as with depictions of cultural property stored in collections and funds, if registration is being sought without the owners consent; the symbol being applied for contains elements that are protected, in one of the member states of an international treaty to which the Russian Federation is party, as symbols permitting the identification of wine or alcoholic beverages as originating from its territory (produced within the borders of a geographic area of this state) and having a particular quality, reputation, or other characteristic that is chiefly determined by its origin, if the trademark is intended as a symbol for wine or alcoholic beverages not originating from the geographic area in question Limits of Protection Exclusive right to a trademark The owner of a registered trademark is granted the exclusive right to use it within the Russian Federation. Without the owner s consent, no one is entitled to use, in public 163

175 circulation, either the trademark itself or an identical or confusingly similar trademark. Exercise of the exclusive right to a trademark is understood as, in particular, use of the trademark: on goods, including on labels and packaging for goods, that are manufactured, offered for sale, sold, demonstrated at exhibitions or trade fairs, or otherwise introduced into the market within Russia, or stored or transported for this purpose, or imported into Russia; in the performance of works or rendering of services; on documentation related to the introduction of goods into the market; in offers for the sale of goods, performance of works, rendering of services, as well as in announcements, on signs, and in advertisements; on the Internet, including in domain names and other addresses. Classes of Goods and Services The registration of trademarks is not universal: the owner of a trademark acquires the exclusive right to use the trademark only for those goods and services for which the trademark has been registered. Trademarks are registered with the use of the International Classification of Goods and Services, in accordance with which the applicant may select the desired classes of goods and services. The owner of a registered trademark is entitled to demand that third parties cease using the trademark only with respect to the goods (services) for which the trademark is registered or which are homogeneous therewith. Therefore, the right choice from the list of registered classes of goods is very important for business, and determines the scope of protection of the means of individualization. Term The initial term of a trademark registration is 10 years. Upon expiration of this period, the trademark owner may renew the registration an unlimited number of times. Renewal of the trademark registration is subject to a state fee. It should be specially noted that upon an interested party s request, submitted to Rospatent s Chamber of Patent Disputes, the validity of a trademark registration may be terminated ahead of schedule if the trademark has not been used by the right holder during the three years prior to the submission of such a request. 164

176 Exhaustion of Rights The validity of an owner s exclusive right to a trademark is limited to the time when such goods are introduced into the market within the Russian Federation by the right holder itself or with its consent (exhaustion of rights). In other words, after the goods have been sold to the first customer, the trademark owner is not entitled to prohibit, for instance, further resale of these goods on the grounds that they are marked with a trademark belonging to it Well-known Trademarks A trademark or symbol being used as a trademark but not protected in the Russian Federation may be recognized as a well-known trademark if, as a result of its intensive use, such a trademark or symbol has become widely known in the Russian Federation in relation to the products of a certain party. A trademark may be recognized as well-known upon an application by its right holder on the basis of a resolution of the Chamber of Patent Disputes. If a registered trademark is recognized as well-known, the legal protection of such a trademark also covers goods that are not homogeneous with those for which the trademark is recognized as well-known, if another party s use of this trademark in relation to said goods will be associated with the right holder by consumers and may damage the right holder s lawful interests Participation of the Russian Federation in International Treaties The Russian Federation is a participant in the main international agreements in terms of the protection of means of individualization in the commercial world, in particular, the Paris Convention for the Protection of Industrial Property of 1883, the Madrid Agreement Concerning the International Registration of Marks of 1891, and the Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the Registration of Marks of Therefore, on one hand, the compliance of Russian legislation with international standards (the Paris Convention) is ensured, and on the other hand the mechanism for the international registration of trademarks may be implemented in the Russian Federation (the Madrid Agreement and the Madrid Protocol) Transfer of Rights to a Trademark The legislation provides for two main types of paid agreements for the transfer of rights to trademarks: agreement on the disposal of the exclusive right to a trademark; 165

177 a license agreement granting the right to use a trademark. Agreements through which an exclusive right to a trademark is administered are subject to state registration with Rospatent and enter into force from the date of such registration. Without state registration, an agreement is considered null and void and does not give rise to legal consequences. Formally, an application for state registration of an agreement must be reviewed by Rospatent within two months, although in practice the registration of agreements may take considerably longer up to eight months Agreement on Disposal of the Exclusive Right to a Trademark Under an agreement on the disposal of the exclusive right to a trademark, the right holder transfers to the acquirer its exclusive right to the respective trademark in its entirety in relation to all or some of the goods, for the individualization of which it is registered. That being said, the original right holder loses the right to independently use the trademark with respect to those goods and services that are covered by the agreement on the disposal of the exclusive right. An agreement on the disposal of the exclusive right is assumed to involve compensation, unless the agreement expressly provides otherwise. If a paid agreement on the disposal of the exclusive right does not contain a provision on the amount of the remuneration or the procedure for determining it, the agreement is not consideredto be concluded. At the same time, the rules for determining a price, on the basis of typical prices for similar objects (Article 424 of the Civil Code), do not apply. In a case of a material breach by the acquirer of the obligation to pay the remuneration within the term established by the agreement, the former right holder may file claim in court for the return of the acquirer s rights to the exclusive right, and for compensation for damages. The legislation imposes one important restriction on agreements for the disposal of the exclusive right: they must not mislead consumers as to a product or its manufacturer. What constitutes misleading is determined in each separate case by the court considering the dispute. This provision creates a certain risk for a party that has acquired rights to a trademark, as there is a possibility for abuse by a dishonest contracting party intending to contest the agreement License Agreements Under a license agreement, the owner of the exclusive right to the trademark (licensor) grants the licensee the right to use the trademark within the limits established 166

178 by the agreement, with or without indication of the territory in which use is permitted applicable to a specific area of business. A license agreement, like an agreement on the disposal of the exclusive right, may be concluded with respect to all or some of the registered classes of goods and services of the trademark. License agreements are divided into two types: ordinary (non-exclusive) license: the licensee is granted the right to use the trademark, and the licensor reserves the right to issue licenses to other parties; exclusive license: the licensee is granted the right to use the trademark, and the licensor does not reserve the right to issue licenses to other parties. In both cases, the licensor retains the right to use the trademark in its own business. A license agreement shall provide for: the subject of the agreement, with reference to the trademark whose usage has been granted under the agreement, with an indication of the number and date of issue of the document certifying the exclusive right (certificate); means of using the trademark. A license agreement is assumed to involve compensation, unless the agreement expressly provides otherwise. If a paid license agreement does not contain a provision on the amount of the remuneration, or on the procedure for determining it, the agreement is not considered to be concluded. A license agreement shall indicate the territory in which the trademark may be used. If such territory is not indicated in the agreement, the licensee may use the trademark throughout the entire Russian Federation. If a license agreement does not specify its term, the agreement shall be deemed concluded for five years. In a case of a termination of the exclusive right, the license agreement is also terminated. Transfer of the exclusive right to the trademark to a new right holder shall not constitute grounds for amending or terminating the license agreement entered into by the former right holder. The licensee is obligated to ensure that the quality of the goods it manufactures or sells, and on which it places the licensed trademark, meets the quality requirements imposed by the licensor. The licensor is entitled to monitor compliance with this provision. The licensee and the licensor bear joint and several liability with respect to claims filed against the licensee as the manufacturer of goods. 167

179 The licensee is obligated to submit, to the licensor, reports regarding the use of the trademark, unless otherwise specified in the license agreement. It should also be noted that license agreements may be implemented as separate agreements or as part of a commercial concession (franchising) agreement, under which rights to use a range of exclusive rights are transferred Sublicense Agreements The licensee may grant a third party the right to use the trademark (a sub-license agreement) only with the licensee s written consent. Under a sub-license agreement, the sub-licensee may be granted rights to use the trademark only to the extent that such rights and means of use are provided for by the license agreement for the licensee. In all other respects, a sub-license agreement is subject to the same rules as a license agreement Brand Concept of brand Detailed legal regulation of the institution of brands emerged in the Russian Federation with the adoption of Part 4 of the Civil Code. A brand may be used for the individualization of commercial, industrial, and other enterprises of legal entities and individual entrepreneurs. Brands are not corporate names and are not subject to mandatory inclusion in the foundation documents and the consolidated state register of legal entities. State registration is not required to protect a brand. The criteria for a brand to qualify for protection are as follows: distinctiveness; novelty; recognizability in the particular territory. A brand may be used by the right holder to individualize one or more enterprises. Two or more brands may not be used simultaneously to individualize a single enterprise. 168

180 Exclusive Right to a Brand The exclusive right to a brand that is used to individualize an enterprise located within the Russian Federation shall be effective within the Russian Federation. The right holder enjoys an exclusive right to use a brand, as a means of individualizing the enterprise belonging to it, in any way not that does not run counter to the law, including by way of placing the brand on signs, letterheads, invoices and other documents, in announcements and advertisements, on goods and their packaging. The exclusive right to a brand may be transferred to another party only as part of the enterprise which the brand is used to individualize. If a brand is used by the right holder to individualize several enterprises, transfer of the exclusive right to the brand to another party as part of one of the enterprises will deprive the right holder of the right to use such a brand to individualize its remaining enterprises. The right holder may grant another party the right to use its brand, in the manner and on the conditions contemplated by an agreement, for the lease of an enterprise or a commercial concession agreement. The exclusive right to a brand lapses if the right holder does not use it during a period of one continuous year A Brand s Relationship to Other Means of Individualization A corporate name is intended to individualize the legal entity participants of civil transactions. A trademark serves to individualize goods (works, services) produced by legal entities and individual entrepreneurs. A brand occupies a special niche among the means of individualization since it is used to individualize an enterprise (commercial, industrial, etc.) as a property unit. Part 4 of the Civil Code refers to the fact that the use of means of individualization, that are different in legal nature but similar in outward appearance or sound, should not mislead consumers. Therefore, it is not permitted to use a brand that may be misleading in terms of an enterprise belonging to a certain party, in particular, a brand that is confusingly similar to a corporate name, trademark, or a brand protected by an exclusive right belonging to another party, for which the respective exclusive right arose earlier. At the same time, a party may use its corporate name or separate elements thereof in a brand belonging to that party. That being said, the exclusive right to a brand arises and is subsequently valid irrespective of the exclusive right to the corporate name. Similarly, a brand or its separate elements may be used by the right holder in a trade- 169

181 mark belonging to it. A brand included in a trademark shall be protected irrespective of the trademark protection Copyright and Related Rights Copyright Protection and Related Rights in Russia The Russian Federation is a member of the principal international treaties in the area of copyright protection and related rights, including: the Universal Copyright Convention (UCC), since 1973; the Berne Convention for the Protection of Literary and Artistic Works (Berne Convention), since 1995; the Convention for the Protection of Producers of Phonograms against Unauthorized Duplication of their Phonograms (Geneva Convention), since 1995; the International Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations (Rome Convention), since The level of legislative protection for the rights of authors, performers, producers of phonograms and broadcasting organizations in Russia is consistent with international standards. However, the situation surrounding the practical implementation of these legislative provisions is somewhat worse. As a result of shortcomings in law-enforcement, Russia still falls behind the more developed countries in terms of the level of actual copyright protection and related rights Copyright Objects Scientific, literary, and artistic works, that are the result of creative activity and exist in some kind of objective form, are protected in Russia as copyright objects. The key criteria for granting legal protection are as follows: presence of a creative component in the work; objective form of expression of the work, e.g., written or oral form (in the form of a public utterance, public performance and other similar forms), in the form of an image, audio or video recording, or in three-dimensional form. At the same time, a work is protected by copyright irrespective of its artistic value, purpose, and means of expression. Part 4 of the Civil Code contains an open-ended list of the types of works that are protected by copyright: literary works; 170

182 dramatic and musical drama works, scripts; choreographic works and pantomimes; musical works, with or without text; audiovisual works; paintings, sculptures, graphic works, design works, graphic stories, comics, and other works of visual art; arts and crafts and theatrical works; works of architecture, city-planning, and landscape art, including drawings, blueprints, pictures, and models; photographic works and works created through similar methods; geographic, geological, and other maps, plans, sketches, and plastic works related to geography, topography, and other sciences; other works. Copyright objects also include: computer programs that are protected as literary works; derivative works, i.e., works that involve the processing of other works (translations, stagings, etc.); composite works, i.e., works representing the results of creative work in their selection or placement of materials (including databases, anthologies, encyclopedias, etc.). Copyright covers not only a work in its entirety, but also parts thereof, as well as the title and characters of the work if, by their nature, they may be recognized as independent results of the author s creative work and meet the criteria for copyright objects. The legislation contains an exhaustive list of objects that, despite formally meeting the criteria for copyright objects, are not protected as such: official documents and their official translations; state symbols and marks; folklore works; 171

183 informative reports on events and facts. Copyright protects the form of expression, but not the content. For example, copyright protects not the ideas, methods, processes, systems, techniques, concepts, principles, discoveries, or facts themselves, but rather the form of their expression: an article, report, description, etc. The copyright of a work is not related to the ownership of the material in which the work is expressed Extent and Scope of Copyright Protection Granting of protection Unlike trademarks and properties protected by a patent, copyright protection is granted by virtue of the very creation of the work, from the moment when the work assumes an objective form. No additional formalities must be observed to obtain the right to protection. Use of the symbol of copyright protection in conjunction with the name of the author and the year of creation of the work is not a condition for granting legal protection, but it may serve as a notice that the work is protected. To enable authorship and the time of a work s creation to be proved before any dispute arises (preferably immediately after the work is created), the author may, for example, deposit a copy of the work with a notary or use postal services (send a copy of the work by registered mail) in order to secure this evidence. In the case of computer programs, a voluntary registration procedure is provided, which does not give rise to rights to a computer program, but is designed to ensure that authorship and the time of the program s creation can be proved. Content of copyright In accordance with the traditions of the countries of continental Europe, it is customary in Russian copyright law to divide copyrights into personal non-property and exclusive (property) rights. Personal non-property rights, as their name suggests, are closely related to the author s identity and, therefore, cannot be transferred to third parties. An exclusive (property) right, on the contrary, can be disposed of by the author to a third party, and constitutes an important component of public circulation. The personal non-property rights of the author include: right of authorship the right to be recognized as the author of a work; 172

184 right to name the right to use, or allow the usage of, a work under the author s own name, under a fictitious name (pseudonym), or without a name being indicated, i.e., anonymously; right of integrity in a work changes, abridgements and additions, additional pictures, preface, epilogue, comments or any other explanations added to the work in the course of its use are not permitted without the author s consent; right to public disclosure of a work the right to take action, or to consent to an action, that will make the work accessible to the public for the first time by means of its publication, public display, public performance, on-air or cable broadcasting, or by any other means; right of withdrawal the right to rescind a previous decision regarding the public disclosure of a work, on the condition that the person to whom the exclusive right to the work was assigned, or to whom the right to use the work was granted, is compensated for any damages caused by such a decision; the right to protect a work, including its name, against any type of distortion or other infringement that may harm the honor and dignity of the author. As a property right, the exclusive right to a work implies the right to use the work in any form and in any manner that does not run counter to the law. The following cases, in particular, are deemed to be using a work, regardless of whether the actions are taken in order to generate profit: reproduction of a work, i.e., production of one or more copies of a work or parts thereof in any tangible form, including as an audio or video recording, production in three dimensions of one or more copies of a two dimensional work, and in two dimensions of one or more copies of a three dimensional work. In the same sense, recording a work on electronic media, including in computer memory, is also viewed as reproduction, except when such a recording is temporary and constitutes an indispensable and essential part of a technological process, whose sole purpose is the rightful use of a recording or the proper dissemination of a work to the public. The ways to dispose of the exclusive right also include: distribution of a work by means of a sale, or other disposal of the original or copies; public display of a work, i.e., any demonstration of the original or a copy directly, or on a screen display, using film, slide, television frame, or other technical means, as well as the demonstration of individual frames of an audio-visual work out of sequence directly or via technical means, in a place open to the public, or in a place 173

185 where there is a significant number of people outside of typical family environment, regardless of whether such work is witnessed at the place of its demonstration or in another place at the same time as the demonstration of the work; import of the original or copies of a work for distribution purposes; renting the original or a copy of a work; public performance of a work, i.e., the presentation of a work in a live performance or with the help of technical means (radio, television and other technical means), as well as the display of an audiovisual work (with or without sound) in a place open to the public or in a place where there is a significant number of persons outside of typical family environment, regardless of whether such work is witnessed in the place of its presentation or demonstration, or in another place at the same time as the presentation or demonstration of the work; on-air broadcasting, i.e. broadcasting a work for the purpose of disseminating it to the general public (including a showing or performance) on the radio or television (including rebroadcast), with the exception of a cable broadcast. That said, any action through which a work becomes accessible for audio and/or visual perception, regardless of its actual perception by the public, is considered to be broadcasting. In the case of on-air broadcasting of works via satellite, on-air broadcasting is understood as the receipt of signals by a satellite from a ground station and the transmission of signals from the satellite whereby the work may be disseminated to the general public, regardless of its actual perception by the public. The transmission of coded signals is to be considered on-air broadcasting if the means of decoding are made available to the general public either by the broadcasting organization, or with its consent; cable broadcasting, i.e., broadcasting a work for the purpose of disseminating it to the general public on the radio or television via cable, wire, optical fiber, or similar means (including rebroadcast). The transmission of coded signals is considered to be cable broadcasting if the means of decoding are made available to the general public either by the cable broadcasting organization, or with its consent; translation or other processing of a work. With this, the processing of a work is understood as the creation of a derivative work (interpretation, screen adaptation, orchestration, staging, and so forth). Any changes to a computer program or a database are considered to be processing (modifications) of the computer program or database, including the translation of such a computer program or database from one language into another, with the exception of adaptation, i.e., making changes solely for the purpose of operating a computer program or a database on the user s specific hardware or under the control of specific programs of the user; 174

186 practical implementation of architectural, design, city-planning, or landscaping projects; disseminating a work to the general public in such a way that anyone may have access to the work from any place and at any time at one s own discretion (dissemination to the general public). Moreover, the law establishes specific additional rights with regard to certain types of copyright objects. For example, the author of a work of visual art is entitled to demand, from the work s owner, access to the work for the purpose of its reproduction (right of access). In certain cases involving a public resale of a work of visual art, the author is entitled to receive royalties from the vendor (artist resale royalty). There is no restriction on the ability to distribute copies of a work introduced into the market via their sale. Term of protection As a general rule, copyright protection lasts for the author s lifetime plus 70 years from the time of his/her death. Upon the expiration of a copyright, the copyright object is considered to be in the public domain and may be freely used by all interested parties. Scope of protection For the purposes of balancing the interests of authors on one hand, and of society on the other, the law limits the monopoly right of authors to use their works, and establishes certain cases where works may be used without the author s consent. The following uses of lawfully published works are allowed without the author s consent and without the payment of royalties: free use for the purpose of ensuring access to information: citation in the original language and in translation for scientific, polemic, critical, or informational purposes to an extent that is justified by the purpose of the citation; reproduction of articles on current economic, political, social, and religious issues; reproduction of publicly delivered political speeches, addresses, or reports; reproduction of works or the dissemination of works to the general public in newsreels by means of photography, cinematography, on-air or cable broadcasting, whereby such works are seen or heard; reproduction without generating profit in raised point type or by other special means for the blind; use for educational or research purposes: limited reproduction (copying) of works by libraries and archives for the purpose of maintaining library holdings; use as illustrations in educational publications and programs; specialized reproductions for the blind; reproduction by educational institutions for teaching purposes; 175

187 public performance of musical works during official and religious ceremonies, as well as for court purposes; creation of a recording for short-term use by on-air broadcasting organizations. It is also permitted to freely reproduce lawfully published works for personal use without the author s consent, with the exception of architectural works, databases, as well as full reproductions of books and notations. That being said, the reproduction of audiovisual works and sound recordings entails an obligation to pay royalties to the author. Protection for the works of foreign authors in Russia, and of Russian authors abroad The scope of protection afforded to copyrighted works is determined in accordance with the laws of the country in which such protection is sought, and depends on the citizenship of the author. In Russia, regardless of the place of publication (or the location of an unpublished work), only the rights of authors who are Russian citizens are protected. Works by foreign citizens are protected if they were either published within Russia (or can be found in Russia in unpublished form) or if a respective international agreement to which Russia is party calls for the granting of protection. The international treaties and agreements under which Russia grants protection to works by foreign citizens published (located) outside of Russia are bilateral agreements with individual countries, as well as the UCC and the Berne Convention. Under the UCC, member states must protect the rights of authors of works first published after the respective state joins the UCC. The Berne Convention, in turn, also provides for the extension of legal protection in the member state to works published before the country in question joined the Berne Convention, provided that the general term of copyright protection for the work has not expired ( retroactive protection ). The situation is complicated by the fact that, when joining the Berne Convention in 1995, Russia negotiated a reservation that excludes the provision of retroactive protection within Russia. The full effects of the Berne Convention in Russia were recognized only after the amendments to the Copyright Law that were adopted in Thus, in determining the scope of protection for rights of foreign authors in Russia and of Russian authors abroad, it is important to look at not only the existence of an international treaty, but also the date of the official publication of the work in the country of origin. 176

188 Disposal of Copyright The author is always the holder of personal non-property rights. The author (authors) also holds (hold) the exclusive right to the work, except in cases where: the work is recognized as a work for hire, i.e., the work was created by the author within the scope of employment, or it was commissioned or ordered by an employer; the exclusive right was inherited by the author s heirs; the exclusive right to the work was disposed of by the author under an agreement (agreement on the disposal of the exclusive right, a commission contract). The general provisions of Russian civil law on obligations and agreements apply to agreements on the disposal of the exclusive right, including agreements on the disposal of the exclusive right and license (sub-license) agreements. Agreement on disposal of the exclusive right to a work Under an agreement on the disposal of the exclusive right, the author or other right holder transfers its exclusive right to a work in full to the acquirer of such right. An agreement on the disposal of the exclusive right shall be concluded in writing. Non-observance of this requirement that the agreement be concluded in writing results in the invalidation of the agreement. An agreement on the disposal of the exclusive right is assumed to involve compensation, unless the agreement expressly specifies otherwise. If a paid agreement on the disposal of the exclusive right does not contain a provision on the amount of the remuneration or the procedure for determining it, the agreement is not considered to be concluded. At the same time, the rules for determining a price on the basis of typical prices of similar objects (Article 424 of the Civil Code) do not apply. In case of a material breach by the acquirer of the obligation to pay the remuneration within the term established by the agreement, the former right holder is entitled to file a claim in court for the return of the rights of the acquirer of the exclusive right, and for compensation for damages. Provisions of an agreement on the disposal of the exclusive right, or of a license agreement, that restrict an individual s rights to create works of a certain type or in a certain area, or to dispose of the exclusive right to such works to other parties, are void. 177

189 License agreement granting the right to use a work Under a license agreement, the author or other right holder (licensor) grants the licensee the right to use a work to the extent established by the agreement. A license agreement shall be concluded in writing. An agreement granting the right to use a work in a periodical may be concluded orally. Special rules also apply to the form of a license agreement for computer programs and databases. A license agreement shall provide for: the subject of the agreement, by means of an indication of the work for which an exclusive right is granted under the agreement; the means of use of the work. A license agreement is assumed to involve compensation, unless the agreement expressly specifies otherwise. If a paid license agreement does not contain a provision on the amount of the remuneration or the procedure for determining it, the agreement is not considered to be concluded. A license agreement shall indicate the territory in which the work may be used. If such a territory is not specified in the license agreement, the licensee may use the work throughout the entire Russian Federation. If the term of the license agreement is not specified therein, the agreement shall be deemed to be concluded for five years. In a case of the termination of the exclusive right, the license agreement shall also be deemed to be terminated. The transfer of the exclusive right to a work to a new right holder shall not constitute grounds for amending or terminating the license agreement entered into by the former right holder. License agreements are divided into two types: Ordinary (non-exclusive) license: the licensee is granted the right to use the work, and the licensor reserves the right to issue licenses to other parties; Exclusive license: the licensee is granted the right to use the work, and the licensor does not reserve the right to issue licenses to other parties. In both cases, the licensor retains the right to use the work for its own purposes. The licensee is obligated to submit, to the licensor, reports regarding the use of the work, unless otherwise specified by the license agreement. 178

190 In a case of the licensee s breach of the obligation to pay remuneration, the licensor may unilaterally withdraw from the license agreement and demand compensation for the damages caused by the termination of such an agreement. Commission Agreement The provisions of Part 4 of the Civil Code on commission agreements govern the relationships between clients and individual authors. The subject of a commission agreement is the creation of a new copyright object in either a tangible medium, or in another form. The tangible medium of the work is transferred to the ownership of the client, unless the parties agree on its transfer to the client for temporary use. Since the agreement is aimed at the creation of a new copyright object, it is necessary to describe the characteristics of the future object in as much detail as possible: the scope, genre, specific elements of the subject, etc. Moreover, in order to avoid future disagreements with the author, it is advisable to spell out in detail the scope of the rights to be transferred to the client. A commission agreement involves compensation, unless otherwise agreed upon by the parties. A commission agreement may specify the disposal to the client of the exclusive right to the work that is to be created by the author, or the granting, to the client, of the right to use such work to the extent established by the agreement. If a commission agreement provides for the disposal of the exclusive right to the client, the rules for agreements on the disposal are applied to such an agreement. If a commission agreement provides for granting the client the right to use the work to the extent established by the agreement, the provisions on license agreements shall be applied to such an agreement. In order to secure the transfer to the client of the property rights to the commissioned object, it is not sufficient to conclude a commission agreement alone. In practice, it is also necessary to draw up a document verifying the fulfillment of the provisions of the agreement, i.e., an act of transfer and acceptance of the rights indicating the rights being transferred to the client, and bearing the signatures of both parties to the agreement Protection of Computer Programs and Databases Computer programs and databases are recognized as copyright objects. Nevertheless, the legal protection of these types of objects has a number of specific features. The following are among the particular features of the legal status of computer programs and databases: 179

191 availability of registration with Rospatent; form of conclusion of an agreement on use; cases of free use; differing legal treatment in a case of creation by commission or under another contract. Registration with Rospatent The registration procedure for programs and databases with Rospatent is voluntary and does not give rise to rights to the computer programs or databases, but rather is intended to ensure that both authorship and the time of creation can be proved. At the same time, agreements on the transfer of the exclusive right to registered programs and databases must also be registered with Rospatent. Form of conclusion of an agreement on use and the material terms of the agreement License agreements granting the right to use a computer program or a database may be concluded by way of each user concluding an adhesion contract with the respective right holder, the terms and conditions of which are indicated on the copy of the computer program or database being purchased, or on the packaging of that copy. The act of starting to use such a program or database by the user, as defined by these terms and conditions, implies the user s consent to enter into the contract. Cases of free use A party that has lawfully acquired a copy of a program or database is entitled to take the following actions without the right holder s consent: to make one backup copy; to make an adaptation, i.e., to make changes in order to ensure the functioning of the computer program or database on the user s hardware or under the control of his/her programs; to analyze, examine, or test the functioning of such a program for the purpose of identifying the ideas and principles underlying any element of the computer program; to carry out a limited decompilation, i.e., to convert the object code into the source code for the purpose of studying the structure and coding of the program, in order to ensure the program will interact with the user s other programs. 180

192 Creation of computer programs by commission or under another agreement Part 4 of the Civil Code establishes various types of legal treatment for cases involving the creation of computer programs and databases by commission, i.e., when the creation of a computer program or database is the immediate subject of an agreement, and in cases involving the performance of works under an agreement that did not expressly provide for the creation of a computer program or database. Creation of computer programs and databases by commission: Unless otherwise specified by the agreement, the exclusive right to a computer program or database created by commission belongs to the client; If the exclusive right belongs to the client, the contractor is entitled (unless otherwise specified by the agreement) to use such a program or database for his/her own needs, pursuant to a free, ordinary (non-exclusive) license, during the entire effective term of the exclusive right; If in accordance with the agreement the exclusive right belongs to the contractor, the client is entitled to use such a program or database for its own needs, pursuant to a free ordinary (non-exclusive) license, during the entire effective term of the exclusive right. Creation of computer programs and databases in the course of performing works under an agreement: If a computer program or a database is created in the course of performing a work contract or an agreement on the performance of scientific research, experimental design, or manufacturing works that did not expressly provide for its creation, the exclusive right to such a program or database shall belong to the contractor, unless otherwise specified by the contract; The client is entitled (unless otherwise specified by the agreement) to use the program or database created in this manner for the purposes in which the respective agreement was concluded, pursuant to an ordinary (non-exclusive) license, during the entire effective term of the exclusive right, without any additional remuneration for such use; If in accordance with the agreement the exclusive right to the computer program or database is transferred to the client, or to a third party specified by the client, the contractor is entitled to use the computer program or database created by him/her for his/her own needs, pursuant to a free ordinary (non-exclusive) license, during the entire effective term of the exclusive right, unless otherwise specified by the agreement. 181

193 Right of a Database Producer The right of a database producer is among the rights related to copyrights, and is a new element in Part 4 of the Civil Code. Conditions for granting protection A database producer is recognized as a person who has arranged for the creation of a database, and the work for assembling, processing, and arranging its component materials. The exclusive right is recognized for a database producer if its creation (including processing or presentation of the respective materials) requires substantial financial, material, organizational or other expenses. In the absence of evidence to the contrary, a database containing at least ten thousand independent data entries (material) is recognized as a database whose creation requires substantial expenses. Content of the exclusive right No one is entitled to extract material from a database and subsequently use it without the right holder s permission. The extraction of material is understood as the transfer of the entire contents of a database, or a substantial part of its component material, to a different informational medium using any technical means and in any form. A person rightfully using a database is entitled, without the right holder s permission, to extract material from such a database and subsequently use them for personal, scientific, educational and other non-commercial purposes, to the extent justified by the purposes indicated. The exclusive right of a database producer is recognized and is valid regardless of the existence and validity of copyright and other exclusive rights of the database producer and other persons to the component material of the database, as well as to the entire database as a composite work. Term of the exclusive right The exclusive right of a database producer originates upon the completion of its creation and is effective for 15 years. With every update of the database, the effective term of the producer s exclusive right is renewed. 182

194 10.5 Industrial Property Industrial Property Another institution in Russian intellectual property law is patent law, in the context of which protection is granted to technical achievements and new industrial developments. In contrast to copyright law, which protects the form of an author s works, including scientific and artistic works, patent law aims to protect the essence and content of technical industrial solutions Patent Law Objects, Registration Criteria Part 4 of the Civil Code identifies inventions, utility models, and industrial designs as patentable objects. Inventions A technical solution in any area relating to a product or method is protected as an invention. The following may be patented as inventions relating to a product: a device; a substance; a microorganism strain; a plant or animal cell culture. Processes involved with a tangible object, and with material resources, are protected as method-related inventions. Exclusive rights to a method are complemented by rights to the product directly manufactured by the patented method (indirect protection), with the new product being deemed to be manufactured by the patented method, unless proven otherwise. An invention is granted legal protection if it meets the criteria of novelty, level of invention, and industrial applicability. Novelty means that the invention is not familiar at the current level of technology in this area, which is understood to mean information that has been generally accessible before the priority date of such an invention. As a general rule, the priority date is the date of submission of the patent application. The disclosure of information about an invention by its author (applicant) does not impair the patentability of the invention, provided the application is submitted to Rospatent at some point in the following six months. Level of invention means that 183

195 the invention is not necessarily obvious to a specialist in the area in question, who is working at the current level of technology. Industrial applicability means that the invention must be suitable for use in industry, agriculture, health care, and other fields. Intellectual achievements without technical solutions, in particular, discoveries, scientific theories and mathematical methods, game rules and methods, intellectual or economic activities, computer programs, and solutions consisting only of the provision of information, are not protected as inventions. Furthermore, patent protection does not cover solutions that contradict the public interest or humane or moral principles. Utility model A utility model is a technical solution relating to a device. In essence, a utility model is similar to an invention, but differs in the sense that the level of invention requirement does not apply to it. The criteria for registration of a utility model are only novelty and industrial applicability. At the same time, it should be noted that the novelty criterion for utility models differs from that for inventions, as in the case of utility models, information on the use of similar devices in Russia is taken into consideration. Industrial design An artistic design solution for an industrial or handcraft product, that defines its outward appearance, is protected as an industrial design. This category is largely similar to shape trademarks, which means that the author of the intellectual property is able to choose between these two types of protection. Industrial designs may be either three-dimensional or flat, as well as being a combination of two- and three-dimensional elements. An industrial design must meet the criteria of novelty and originality. An industrial design is recognized as new if the totality of its essential features is unfamiliar on the basis of information that has been generally accessible before the priority date of the industrial design. An industrial design exhibits originality if its aesthetic and ergonomic characteristics are the result of creative activity. The following are not recognized as industrial designs: solutions related only to the technical function of an object; architectural objects (except for minor architectural forms); permanent industrial structures; and non-solid objects liquids, gases, granular and similar substances. 184

196 The following may not be covered by patent rights: methods of human cloning; methods of modifying the genetic continuity of cells of human embryos; use of human embryos for industrial and commercial purposes; other solutions contradicting the public interest or humane and moral principles Patents for Industrial Properties Legal protection of inventions, utility models, and industrial designs is provided on the basis of patents issued by Rospatent. A patent application may be submitted by the author or his/her legal successor. If the intellectual property in question is an employee invention, employee utility model, or employee industrial design, the right to submit an application belongs to the author s employer for four months after the protectable property has been created. Foreign applicants cannot apply to Rospatent directly, but rather must apply via a patent attorney acting under a power of attorney. A decision to register an invention, industrial design, or utility model is taken based on an examination of the application. Examination of an application for an invention The examination of a patent application for an invention involves two stages: formal examination of the documents and substantive examination of the invention. In the course of the substantive examination, an informational search is conducted in order to determine the level of technology involved, and the invention for which a patent is being applied for is checked in order to establish whether it meets the registration conditions. The applicant is entitled to postpone the substantive examination for three years from the date of submission of the application. Upon the expiry of eighteen months from the date of the application, Rospatent publishes the application and any person may examine the materials thereof. An important consequence of the publication of the application is that the application becomes temporarily protected, whereby any person using the invention being patented after publication of the application will have to pay compensation to the applicant, if the latter subsequently receives a patent. 185

197 Examination of an application for a utility model By default, the examination of an application for a utility model involves only the verification stage of formal compliance of the documents with established requirements, and of whether the proposed solution is actually subject to protection as a utility model. A patent for a utility model is granted without checking whether the utility model, for which a patent is being applied for, meets the criteria for registration, which means there is no guarantee of its long-term validity. Later, based on an application by any third party, a search may be conducted to check whether the level of technology involved is consistent with legal requirements, and the issued patent may be contested. Until a decision is made on an application, the applicant may convert the application for a utility model into an application for an invention. Likewise, an application for an invention may be converted into an application for a utility model. Examination of an application for an industrial design The examination of an application for an industrial design, like the examination of an application for an invention, consists of two stages: a formal examination of the documents, and a substantive examination. At the same time, in the course of the substantive examination, the issue of the compliance of the design being applied for with the statutory requirements for industrial designs is considered Extent and Scope of Protection A patent certifies the exclusive right of the party, to which the patent has been issued, to use the patented object. The exclusive right of a patent holder means that third parties are not entitled to use the patented object without the patent holder s consent. Use of an invention, utility model, or industrial design is considered to be, in particular: Importing into the Russian Federation, manufacturing, using, offering for sale, selling, otherwise introducing into the market, or keeping for these purposes: a product that uses a patented invention or utility model; a product that uses a patented industrial design; a product directly derived from a patented method; a device that automatically implements a patented method while functioning (operated) according to its purpose; Applying a method that uses a patented invention. 186

198 The effect of a patent is limited in time and space. The terms of patents are as follows: a patent for an invention 20 years from the date of submission of the application; a patent for a utility model 10 years, with the right of renewal for 3 years; a patent for an industrial design 15 years, with the right of renewal for 5 years. The exclusive right from a patent issued by Rospatent is valid only within the Russian Federation. Each year, the patent holder must pay the state fee to keep the patent in force. If the fee has not been paid on time, the patent is canceled, although it may be reinstated within three years of the expiration of the deadline for paying the fee. At the same time, a party that has started using the patented object during the period between the cancelation of the patent and its reinstatement retains the right to continue using it free of charge. Part 4 of the Civil Code provides for a number of exceptions whereby a patented object may be used by third parties without the patent holder s permission. The possession of a patent not only entitles, but also obligates the patent holder to use the protected object. If a patented invention or industrial design is not used (or is used insufficiently) during a period of four years from the issue date of the patent, or if a utility model is not used during a period of three years from the issue date of the patent, then any party ready to use the patented object is entitled to claim for provision of a compulsory license for the patent. The amount of compensation in this case is determined through agreement between the parties, or by a court International Mechanisms for Patent Protection The Russian Federation participates in a number of international treaties in the sphere of industrial property protection, chief among which are: The Paris Convention for the Protection of Industrial Property of Russia has participated since The convention establishes the possibility of using the convention priority in member states; The Patent Cooperation Treaty of In the case of Russia, the treaty entered into force in The treaty simplifies the procedure for obtaining patents in member states on the basis of a national application; 187

199 The Eurasian Patent Convention of For Russia, the convention entered into force in The convention creates a mechanism for obtaining a single patent that provides protection within certain states of the former Soviet Union (Russia, Kazakhstan, Azerbaijan, Kyrgyzstan, Moldova, and Armenia). Apart from said multilateral international treaties, the Russian Federation has a number of bilateral agreements with other countries. Moreover, Russian inventors may obtain patents under the national registration systems of other countries, and submit applications within the framework of international treaties in which the Russian Federation does not participate. An example is the European Patent Convention of 1973, under which a patent may be obtained that is valid within all of its participating states Transfer of Rights to a Patent Rights to use a patented object may be transferred under agreements on the disposal of the exclusive right and license agreements. Any agreement on the disposal of the exclusive right to an invention, utility model, or industrial design is subject to state registration with Rospatent, and enters into force as of such registration. Under an agreement on the disposal of the exclusive right to an invention, utility model, or industrial design (agreement on the disposal of a patent), the patent holder transfers its exclusive right to a patent in its entirety to the acquirer of the patent. In such a case, the initial patent holder forfeits its rights to the patent. Under a license agreement, the patent holder (licensor) grants the licensee the right to use the invention, utility model, or industrial design covered by the patent, to the extent established by the agreement. License agreements may be exclusive or non-exclusive: ordinary (non-exclusive) license: the licensee is granted the right to use an invention, utility model, or industrial design, and the licensor reserves the right to issue licenses to other parties; exclusive license: the licensee is granted the right to use an invention, utility model, or industrial design, and the licensor does not reserve the right to issue licenses to other parties. In both cases, the licensor retains the right to use the patented object for its own purposes Right to a Production Secret (Know-how) Changes in legislative regulation Relationships arising in connection with the creation and use of production secrets are governed by Part 4 of the Civil Code (Chapter 75). In addition, the articles of the 188

200 Federal Law on Trade Secrets (No. 98-FZ of July 29, 2004), governing the procedure for establishing trade secret protection, remain in force. Part 4 of the Civil Code has systematized the legal regulation of production secrets, introduced the definition of know-how, and defined the authority of owners. Any information constituting a trade secret is characterized as a production secret (know-how) by Part 4 of the Civil Code Definition Production secrets are understood as information of any kind, including information about intellectual properties in the scientific and technical sphere and information on methods of carrying out professional activities, and which has current or potential commercial value by virtue of being unknown to third parties, that is not freely accessible to third parties by legal means, and for which the owner of such information has established trade secret protection. Certain types of information, as expressly indicated by law, may not constitute a production secret due to the fact that trade secret protection may not be established in respect of such information. A list of these types of information is contained in the Federal Law on Trade Secrets. In particular, such information includes the following: information contained in the foundation documents of a legal entity, documents verifying entries on legal entities and individual entrepreneurs in the relevant state registers; information on environmental pollution, the condition of fire safety systems, the health and disease-control and radiation situation, the safety of food products, and other factors adversely affecting the safe operation of industrial facilities, the safety of each citizen, and of the population in general; information on the number and composition of employees, the system of remuneration and working conditions, including occupational safety; information on industrial injuries and job-related illnesses, as well as on vacancies; information on violations of Russian Federation laws, and on prosecutions for such violations; information on the amount and structure of the income of nonprofit organizations, on the size and composition of their property, on their expenses, on the workforce and wages of their employees, and on the use of unpaid labor of individuals in the activities of nonprofit organizations; information on the list of individuals authorized to act on behalf of a legal entity without a power of attorney. 189

201 Trade Secret Protection As before, relationships relating to the establishment, alteration, and cancelation of trade secret protection are governed by the Federal Law on Trade Secrets. Trade secret protection is deemed to have been established after the following measures have been taken by the owner of the information: compiling a list of the information that constitutes a trade secret; limiting access to the information that constitutes a trade secret by implementing procedures for handling the information and monitoring compliance with such procedures; listing the individuals with access to the information that constitutes a trade secret and/or the parties to which such information has been disclosed or transferred; regulating relationships with regard to the use of information that constitutes a trade secret by employees on the basis of employment contracts, and by contracting parties on the basis of civil law contracts; marking physical media (documents) containing information that constitutes a trade secret with the words Trade Secret and the name of the owner of this information, or including said words and name in the details of documents containing such information Exclusive Right to a Production Secret (Know-how) In Part 4 of the Civil Code, the exclusive right to a production secret (know-how) is understood as the right to use the production secret in any way that does not run counter to the law, including during production and in the implementation of economic and organizational solutions. The law rules out the necessity to register a production secret with state authorities. Therefore, the exclusive right to a production secret arises for the right holder from the establishment of trade secret protection. The exclusive right to a production secret may also arise directly at the time of obtaining the information, if the information obtained is classified as information for which trade secret protection has already been implemented. The law allows for the possibility of several right holders possessing the exclusive right to one and the same production secret, if each of the right holders has obtained the information, constituting such a production secret, independently of the others. Honesty and independence in obtaining a production secret means that the party that has become a new owner of the production secret obtained the respective informa- 190

202 tion as a result of entirely independent intellectual activities, without the knowledge and use of information belonging to other owners of the production secret. The exclusive right to a production secret remains valid as long as the confidentiality of the information constituting such a secret is maintained. As soon as the respective information is no longer confidential, the exclusive right of all right holders to the production secret shall lapse Disposal of the Exclusive Right to a Production Secret The owner of a production secret may dispose of the right attached to it. This is possible by means of agreements on the disposal of of the exclusive right to a production secret, and license agreements granting the right to use a production secret. Agreements on the disposal of the exclusive right to a production secret must be concluded in writing; failure to observe this requirement will result in their invalidation. Under an agreement on the disposal of the exclusive right to a production secret, the right holder fully transfers its exclusive right to the acquirer. As of the disposal of the exclusive right to a production secret, the former right holder loses its right thereto and the acquirer becomes the new right holder. At the same time, it should be noted that the party that has disposed of its exclusive right often retains factual knowledge of the information constituting the production secret. In a case involving the disposal of the exclusive right to a production secret, the party disposing of its right is obligated to maintain the confidentiality of the production secret until the exclusive right to the production secret has lapsed. Under a license agreement, the holder of the exclusive right to a production secret (licensor) grants the licensee the right to use the respective production secret, to the extent established by the agreement. A license agreement may be concluded with or without a defined term. If the term of a license agreement is not defined, either party is entitled to opt out of the agreement at any time, with six months notice thereof to the other party, unless the agreement specifies a longer term. The licensor is obligated to maintain the confidentiality of the production secret for the entire term of the license agreement. The licensee is obligated to maintain the confidentiality of the production secret until the exclusive right to the production secret has lapsed Ownership of the Exclusive Right to a Production Secret The exclusive right to a production secret belongs to the owner of the production secret. The exclusive right to an employee production secret belongs to the employer. In this 191

203 case, the employee is obligated to maintain the confidentiality of the obtained information up until the exclusive right has lapsed. Under earlier legislation, the employee was obligated to not disclose a trade secret after termination of the employment contract for a period determined by agreement of the parties, or for three years after the termination of the employment contract if no such agreement was reached. If a production secret is obtained in the course of performance of a work contract, a contract agreement on the performance of scientific research, experimental design, or manufacturing works, or under a state or municipal contract for state or municipal needs, the exclusive right to such a production secret belongs, as a general rule, to the contractor (performer) Liability for a Breach of the Exclusive Right to a Production Secret A breach of the exclusive right to a production secret is recognized as unlawfully obtaining, disclosing, or using information that constitutes a production secret. A party breaching the exclusive right to a production secret is obligated to compensate for any damages caused by such a breach, unless the law or the agreement with such a party provides for other liabilities. A user of a production secret, who has obtained the information accidentally or by mistake and was unaware that he/she is using such information illegally (a bona fide acquirer), is exempt from liability Protection of Rights in the Intellectual Property Sphere Competent State Authorities Civil, administrative, and criminal liability arises for an infringement of intellectual rights to intellectual properties and means of individualization. Protection of rights in the intellectual property sphere is, inter alia, one of the focuses of the law-enforcement activities of the government. Therefore, the entire system of law-enforcement agencies of the Russian Federation including the Public Prosecution Office, Interior Ministry (MVD), Federal Security Service (FSB), Customs Authorities, etc. is involved in combating the unlawful use of intellectual properties. Each of these agencies acts within the scope of its general authority, and recourse to such agencies constitutes an important element of protection, when there are signs of the unlawful activity that one of these agencies has been instructed to suppress. Also worth mentioning is the Federal Antimonopoly Service which, although not directly a law-enforcement agency, does have special authority on issues related to the use of intellectual properties. This service was established, inter alia, to combat 192

204 unfair competition, which in accordance with the Law on the Protection of Competition of July 26, 2006, includes prohibiting the sale, exchange, or any other manner of introduction into the market of goods, if during which there occurs the unlawful use of intellectual properties and equivalent means of individualization of a legal entity, goods, and services. The antimonopoly service is entitled to issue binding orders to cease violations, with which a failure to comply entails administrative liability. Rospatent plays a particular role in the protection of intellectual property in Russia, and its various functions have already been described above. Besides those mentioned above, Rospatent s functions include, in particular: monitoring and supervision of the legal protection and use of intellectual properties, patents, and trademarks, and intellectual properties involved in economic and public circulation; observance of the interests of the Russian Federation, Russian individuals, and legal entities in the distribution of rights to intellectual properties, including those created within the framework of international scientific and technical cooperation. The Chamber for Patent Disputes should be separately mentioned when describing the structure of Rospatent. This institution resolves out-of-court disputes related to the issue and validity of patents, and the registration of trademarks in the Russian Federation. The Chamber s authority includes, among others, the following matters: handling objections to a decision to refuse to issue, or a decision to issue, a patent, or to issue a patent for an invention, utility model, or industrial design; handling objections to a decision on the recognition of the withdrawal of an application for an invention, utility model, or industrial design; handling objections to the validity, within the Russian Federation, of a previously issued copyright certificate, or a Soviet or Eurasian patent for an invention; handling objections to a decision based on the outcome of a formal examination of an application for registration of a trademark and which refuses to accept the application for consideration; handling objections to a decision of an expert examination of a symbol under a trademark registration application, and to a decision for granting, or refusal to grant, protection in accordance with the Madrid Agreement Concerning the International Registration of Marks; handling objections to a decision for the recognition of a withdrawn application for registration of a trademark; 193

205 handling objections to the provision of legal protection to a trademark, and to the provision of protection for the international registration of a trademark within the Russian Federation; handling applications for recognition of a trademark as well-known in the Russian Federation, and an objection to recognition of a trademark as well-known; handling applications for the early termination of legal protection of a trademark. A decision of the Chamber enters into force from the moment of its signing by the head of Rospatent, and may be further appealed in an arbitration court or court of general jurisdiction. At the same time, since commerce in intellectual properties is within the sphere of civil law, one of the main remedies is recourse to a court of general jurisdiction, arbitration court, or arbitral tribunal Consequences of Infringement and Remedies Civil law remedies In a case of an infringement of intellectual property rights, all remedies contemplated by the Civil Code may be used to protect such rights, taking into account the specifics of relationships in the area of commerce in intellectual properties. It should also be taken into consideration that the list of remedies in the Civil Code is open-ended, which means that the aggrieved party may have recourse to other lawful remedies. The main remedies are claims to cease or eliminate violations, which may take the form of ceasing the sale of certain products, taking down signs, removing labels from products, compensation for damages and emotional distress (injury to goodwill), and, in certain cases, claims for recognition of the plaintiff s right by the court. Compensation for damages is a key remedy, although, owing to the specifics of commerce in intellectual properties, calculating and proving the amount of damages may turn out to be difficult for the right holder. Part 4 of the Civil Code establishes cases in which, given infringement of an exclusive right, the right holder is entitled to claim for payment of an indemnity by the infringing party, instead of compensation for damages. That being said, the amount of the indemnity will be determined by the court depending on the nature of the infringement and other circumstances of the case, and the right holder is exempt from having to prove the amount of inflicted damages. A claim for payment of an indemnity may be filed in the following cases: infringement of the exclusive right to a work (indemnity from 10,000 to 5,000,000 rubles, or two times the value of the copies of the work); 194

206 infringement of the exclusive right to an object covered by related rights (indemnity from 10,000 to 5,000,000 rubles, or two times the value of the copies of the recording); infringement of the exclusive right to a trademark (indemnity from 10,000 to 5,000,000 rubles, or two times the value of the goods illegally bearing the trademark); unlawful use of a denomination of origin of goods (indemnity from 10,000 to 5,000,000 rubles, or two times the value of the goods illegally bearing the denomination of origin of the goods). The right holder is entitled to claim for payment of an indemnity by the infringing party for each instance of unlawful use of intellectual properties or means of individualization, or for the violation committed as a whole. Moreover, Part 4 of the Civil Code provides for a new, special type of liability for the infringement of intellectual property rights. Now, in a case involving a repeated or gross violation of exclusive rights to intellectual properties and means of individualization, a legal entity may be liquidated by a court based on a claim from the prosecutor, while the activities of an individual entrepreneur may be ceased based on a court judgment or order. Administrative and criminal liability Apart from civil liability, criminal and administrative liability is established for a number of offenses related to the production and sale of counterfeit goods. Depending on the severity of the offense and the value of the counterfeit goods, the violator will be brought to justice under the Code of Administrative Offenses of the Russian Federation (in cases involving less serious crimes) or the Criminal Code of the Russian Federation (if the value of the counterfeit goods is in excess of 100,000 rubles, or if the damage from unlawful use of another entity s trademark is in excess of 1,500,000 rubles). The Criminal Code contains three articles that are specifically dedicated to offenses in the sphere of the use of intellectual properties: on the unlawful use of trademarks (Article 180), on infringement of copyright and related rights (Article 146), and on infringement of invention and patent rights (Article 147). The penalties put forward by these articles vary from a fine of 200,000 rubles, to imprisonment for up to 6 years for crimes committed by a group of persons acting in collusion. The Code of Administrative Offenses devotes two articles to the above offenses: Article 7.12 on infringement of copyright and patent rights, and Article on the unlawful use of trademarks. The Code of Administrative Offenses puts forward penalties in the form of fines of up to 2,000 rubles for individuals and up to 40,000 rubles for legal entities. The Code also provides for the possibility of confiscating the counterfeit goods and the means of their production. 195

207 Contacts FALK TISCHENDORF Partner, Head of office BEITEN BURKHARDT Moscow Turchaninov Pereulok 6/ Moscow Tel.: Fax: NATALIA WILKE Partner, Head of office [email protected] BEITEN BURKHARDT St. Petersburg Marata str , Lit. A, office St. Petersburg Tel.: Fax:

208 BEIJING BERLIN BRUSSELS DUSSELDORF FRANKFURT AM MAIN MOSCOW MUNICH NUREMBERG SHANGHAI ST. PETERSBURG