Branching into Russia: Two Investors' Options

Discussions about the legal form that investment in the Russian Federation can take usually concentrate on representative offices and Russian subsidiary companies. There are other possibilities, including limited partnerships and associations, but with less familiar structures and vague regulations, they are less frequently used by foreign investors.Another medium for investors comes in the form of branches, either of foreign or Russian companies. "Branch" is often used to mean a representative office. Although the two are similar for many practical purposes, they are referred to separately in the Russian legislation and there are some important distinctions.The law defines both a representative office and a branch as a separate subdivision of a legal entity, with a separate location from the parent company. The branch is said to carry out some or all of the functions of the parent, whereas the representative office "protects and represents" the interests of the legal person and can complete transactions on its behalf.Branches and representative offices of foreign companies are not separate legal entities but are treated as part of the parent company. There are various consequences of this status: They do not own property, but use property allocated to them by the parent company; they have internal regulations to govern their relations with the parent company; the manager of the office is appointed by the parent by power of attorney which sets out his authority; they have separate balance sheets but these form part of the balance sheet of the parent company.Perhaps the most important aspect of this dependant status is that branches and representative offices cannot enter into contracts in their own names and cannot take part in court proceedings, except on behalf of the parent company.One difference between branches and representative offices is that although a branch of a foreign company is not a separate legal entity from its parent company, it is treated as resident for the purposes of the tax and currency legislation. A practical difference is that the Russian authorities are less familiar with the concept of the branch and there have been cases where they have refused to recognize them. More to the point, the draft of the new law on foreign investment does not recognize branches of foreign companies and those which have already been registered will have to be restructured. This will not apply to branches of Russian companies so that foreign investors will still be able to establish 100 percent-owned subsidiary companies and then open branches of that company in Russia if they want to separate out the activities of the company into different divisions.Marcia Levy, an attorney with Norton Rose, has been practicing law in Moscow for three years.