Since Russia has been closely interacting with China in various fields over the past decades, many Russian representatives of small and medium-sized businesses are beginning to actively cooperate with Chinese partners. Russian businessmen who are not aware of the peculiarities of the Chinese mentality may encounter serious difficulties when signing contracts with Asian partners.

In this review we would like to draw your attention to the important features of concluding contracts between partners from Russia and China, which will help you to avoid a number of mistakes:

1. The only official language in China is Chinese. Thus, it is advisable to sign the text of the contract not in Russian and English, but in Russian and Chinese (the official languages of Russia and China).

If the Chinese partners do not insist on this, this can only mean that they do not intend to register the contract with the Chinese government authorities.

2. The name of a Chinese company registered in China can only be in Chinese, and the English name of the company is not legally valid to the full extent Chinese, as well as Russian, courts do not consider claims if the documents do not indicate the real (registered) company names.

3. It is necessary to check the registration of the Chinese company by requesting from the partner a certificate of registration of a legal entity, and also make sure that its representative has the appropriate authority.

It should be kept in mind that only the legal representative of the company has the right to sign a contract without a power of attorney. This may not always be the CEO of the company. The legal representative must be indicated in the certificate of registration of a legal entity.

If someone else signs the contract on the Chinese side, they are required to present a power of attorney. Therefore, when concluding a contract with a Chinese company, it is worth asking the future partner for a power of attorney confirming the authority of the signatory.

4. It is important to check the registration (legal status) of the Chinese seal.

Each Chinese company generally has one main seal, which is strictly controlled. However, to support various types of activities, companies often produce additional types of seals, including “contract seals.” Having produced such seals, Chinese companies often do not amend the registration documents accordingly or otherwise register their legal status.

In this regard, it is recommended to check whether the Chinese partner’s seal is registered by requesting a certificate from the State Commerce and Industry Administration of the government at the place of registration of the Chinese company. It is quite easy to obtain such a certificate, and falsifying it is dangerous for a Chinese partner.

5. To protect yourself, it is recommended to check the company’s website. The site must have a Chinese version, otherwise there is a high chance of encountering scammers. You should check the domain name registration date and ownership.

6. In order to avoid difficulties with the recognition and enforcement of decisions of Russian courts in China, it is recommended to introduce an arbitration clause and include in it one of the well-known institutional arbitration centers in China, for example, the China International Economic and Trade Arbitration Commission (CIETAC), the Beijing Arbitration Commission (BAC), etc.

On the one hand, this will require additional costs for contacting Chinese lawyers or Russian specialists with experience in representing the interests of parties in Chinese arbitration. On the other hand, this will simplify the issue of recognition and enforcement of the decision under the New York Convention of 1958.

If the Chinese partners do not want to resolve the dispute in arbitration due to the high cost of the procedure, then, in order to avoid difficulties with the recognition and execution of decisions of Russian courts in China, it is better to establish a clause for those disputes, for which this is possible, regarding their resolution in a Chinese state court, since Russian courts readily recognize decisions of Chinese courts.

In this review, we have summarized the rules governing the required notifications and reports that must be filed in the Russian Federation if you have (or are acquiring) a share in a foreign organization.

When creating/acquiring a share in a foreign organization: notification

When a share in a foreign organization arises (or changes), regardless of the size of the share, an individual who is a tax resident of the Russian Federation must file a notification of participation in foreign organizations (on the establishment of foreign structures without forming a legal entity).

This notification must be filed no later than three months from the date of the emergence (change in share) of participation in a foreign organization.

Failure by a taxpayer to submit a notification of participation in foreign organizations to the tax authority within the prescribed period or submission of a notification of participation in foreign organizations containing inaccurate information entails a fine of 50,000 rubles for each foreign organization.

What is considered a controlled foreign organization (CFO)?

A controlled foreign company is a legal entity or a structure without the formation of a legal entity, the place of tax residence of which is a jurisdiction other than the Russian Federation, controlled by a legal entity or an individual who is a tax resident of the Russian Federation.

When creating / acquiring a share in a CFC (controlled foreign organization)

When a share in the CFC arises (changes) the individual must submit a notification of controlled foreign companies to the tax authority at the place of registration during the reporting year, but no later than April 30 of the year following the reporting year. The deadlines for sending an annual notification of a CFC to the Federal Tax Service for individuals are set out in Article 25.14 of the Tax Code of the Russian Federation.

The notification form is set out in legislation.

In addition to the notification form itself, it is necessary to collect a package of documents on the controlled foreign company and its participant. Typically, this list includes:

1. Certificate of registration of the organization and an extract from the trade register;

2. Certificate of the state – tax registrar;

3. Financial statements of the CFC, prepared in accordance with the personal law of such a company for the financial year. In case of its absence, it is necessary to submit other documents that confirm the profit or loss of the company;

4. Auditor’s report on the financial statements of the CFC, if the audit is mandatory or the company voluntarily conducted an audit;

5. Copy of the passport of the CFC participant;

6. Notarized power of attorney in case of notification by a third party.

If the original documents are attached not in Russian, a notarized translation is required.

Calculation of the tax base for the CFC

The minimum amount of CFC profit that can be used as a taxable base is 10 million rubles, CFC profit below this amount is not taxed in the Russian Federation and is not subject to declaration.

If the profit of a controlled foreign company exceeds 10 million rubles, it is used as a tax base for calculating income tax and is filled in the 3-NDFL declaration (Sheet B) for individuals. Information on each CFC is submitted separately, the data is not summarized. Declarations must be submitted to the Federal Tax Service as part of the normal procedure for filing declarations along with other sheets of the document.

Particular attention should be paid to determining the date of receipt of profit from the CFC by the controlling person – December 31 of the year following the tax year of the foreign organization. The dates of receipt of profit and reporting on it are clearly presented in the diagram:

Cross-border transfer of personal data: new rules

On 30.12.2022 an extract from the minutes of the meeting of the sub-commission of the Government Commission for Control of Foreign Investment in the Russian Federation (hereinafter the “Sub-Commission”) No. 118/1 dated 22.12.2022 was published on the official website of the Russian Ministry of Finance.

According to the information contained in this extract, the Sub-Commission sets out the conditions that must be complied with in order to obtain permission to carry out transactions involving company shares. In particular, these include:

• independent assessment of the market value of the assets;
• sale of assets at a discount of at least 50% of the market value of the relevant assets as indicated in the asset assessment report;
• establishment of key performance indicators for the new owners;
• availability of an instalment payment for 1-2 years and/or an obligation to make a voluntary contribution to the federal budget of at least 10% of the amount of the transaction.

Please be reminded that our previously published regulations on transactions with limited liability company shares can be found in detail here.

In addition, the Sub-Commission lists conditions that will be taken into account when deciding on issuing permissions to organisations for payment of dividends to foreign participants in cases stipulated by Presidential Decrees No. 95 dated 05.03.2022 and No. 254 dated 04.05.2022, when the payment exceeds 10 million roubles per calendar month or the equivalent of this amount in foreign currency at the official exchange rate of the Central Bank of Russia set on the 1st day of each month. These include, in particular:

Dear colleagues,

We would like to wish you a happy New Year!
May the coming year be peaceful, prosperous and successful!
Thank you for your trust and collaboration.

With deep respect,
Your team of swilar

Earlier we brought to your attention the new requirement for mandatory approval by the Government Commission for transactions with shares in limited liability companies (OOO) (introduced by Presidential Decree No. 618 of 08.09.2022). We would like to remind you that this refers to transactions with OOO shares involving entities from foreign countries that commit unfriendly acts against the Russian Federation.

In the following overview, we have compiled for you information on the procedure for obtaining such a permit (approved by Government Resolution No. 1651 of 19.09.2022).

On 13.10.2022 the Ministry of Finance published official clarifications (letter No. 05-06-14RM/99138 of 13.10.2022) specifying types of transactions covered by the new regulations. According to these clarifications, the following types of transactions will require approval by the Government Commission:

• transfer of a part in the share capital of an OOO to one or more participants of the OOO or to a third party;
• acquisition by an OOO of a share in its share capital;
• withdrawal of a participant from an OOO by disposing of their share in the OOO or by claiming the acquisition of a share in the OOO;
• transfer of a share in an OOO to an investment fund;
• agreement with a commercial organization or individual entrepreneur on delegation of authority of the sole executive body of an OOO;
• agreement on exercising participants’ rights in an OOO;
• contract of convertible loan;
• OOO share pledge agreement;
• OOO share pledge management agreement;
• voluntary reorganization of an OOO in accordance with the legislation of the Russian Federation;
• an ordinary partnership agreement entered into by an OOO;
• agreement of trust management, agency and (or) other agreement on exercise of rights certified by OOO shares;
• other transactions.

We remind that the special procedure established by Presidential Decree No. 618 of 08.09.2022 does not apply to organisations in the financial and fuel and energy sectors.

The Russian Ministry of Finance also clarified that the approval of the Government Commission is not required for transactions executed against the will of an entity as part of the execution of a legally enforceable court decision.

At the same time we would like to draw your attention to the Presidential Decree No. 737 of 15.10.2022 which imposes additional restrictions on residents making payments in cases (1) of reduction of share capital of an OOO, (2) liquidation of an OOO and (3) bankruptcy procedures applied to an OOO.

Under the new regulations, making payments in these cases to entities from foreign countries committing unfriendly acts against the Russian Federation in an amount exceeding RUB 10 million per calendar month will require the use of a C-type special account (for a detailed overview of the use of C-type special accounts, see link) or obtain authorisation from the Russian Ministry of Finance.

Earlier we informed you that on 08.09.2022 the President of the Russian Federation issued the Decree No. 618 (hereinafter referred to as “Decree”).

This Decree establishes the requirement to obtain permission fr om the Government Commission for Control of Foreign Investment in the Russian Federation (“Government Commission”) for transactions with shares in limited liability companies (“OOO”), if the parties to such transactions are persons from foreign countries that commit unfriendly acts against the Russian Federation.

On 19.09.2022 the Government of the Russian Federation issued the Resolution No. 1651 “On Amendments to Resolution No. 295 of the Government of the Russian Federation of 6 March 2022“ (the “Resolution”) that regulates the procedure for obtaining the respective approval of the Government Commission.

The list of cases wh ere the Government Commission is authorized to issue permits includes transactions resulting directly and/or indirectly in the establishment, modification or termination of rights to own, use and (or) dispose of shares in the authorised capital of OOOs or other rights allowing to determine the management conditions of such OOOs and (or) the conditions for their entrepreneurial activities.

According to the Resolution, in order to carry out the abovementioned transactions involving persons from foreign countries that commit unfriendly acts against the Russian Federation, the rules previously issued in relation to loans and credits with persons from unfriendly countries by Resolution of the Government of the Russian Federation No. 295 of 6 March 2022 will be fully applied.

It is envisaged that a permit to carry out a transaction or a group of transactions (“permit”) can be obtained by applying to the Ministry of Finance of the Russian Federation with an application and accompanying documents, the list of which is established by the Resolution of the Government of the Russian Federation No. 295 of 6 March 2022.

Please note that the Ministry of Finance of the Russian Federation can also be approached by federal executive bodies and (or) the Bank of Russia in order to issue a permit. In this case, the application and accompanying documents must be submitted to the relevant federal executive body and (or) the Bank of Russia.

The application and accompanying documents must be drawn up in Russian. If the original documents are in a foreign language, a duly certified translation into Russian (with an apostille of the competent authority of the state in which the document was drawn up) will be required.

The application and accompanying documents may be submitted both in hard copy and electronically, including in the form of electronic documents signed with a digital signature.

We will be happy to answer your questions and assist you in preparing the package of documents required to obtain the permit.

We would like to draw your attention to the recent changes in tax legislation introducing new rules for charging and paying VAT.

Currently, and until September 30, 2022, there is a procedure for paying VAT on electronic services provided by foreign suppliers, in which the foreign supplier must independently register with the Federal Tax Service of the Russian Federation, obtain a TIN, submit a VAT return and pay it. From 01.10.2022 the Federal Tax Service and the Ministry of Finance presented the former (used until 2019) procedure for the payment of VAT from electronic services. In a letter dated 08.08.2022, the Federal Tax Service also explained the changes to be introduced.

This means that VAT is paid and recovered by the Russian organization receiving the services as a tax agent. At the same time, if a registered foreign provider of electronic services also provides non-electronic services, there is no tax agent liability for Russian buyers. However, the buyer has the right to pay VAT on such services himself (Letter of the Federal Tax Service of the Russian Federation dated 24.04.2019 №СД-4-3/7937). In practice, it is easier and more convenient for a Russian organization buying any services from a foreign supplier to transfer VAT to the Russian budget as a tax agent.

For all payments made to a foreign counterparty before 1 October 2022 under the old rules, the buyer is entitled to reimburse the VAT paid to the foreign seller.

However, these changes do not exempt foreign service providers from having to register with the FTS. The procedure for this action has also undergone changes; now a foreign organization can get registered by opening a bank account.

The principle is set out in Articles 83-84 of the Tax Code as amended by Federal Law No. 120-FZ of 1 May 2022.

The application for registration is completed, certified with an Enhanced Qualified Electronic Signature by an authorized person of the Russian bank and sent to the Federal Tax Service. Once the foreign organization has been registered, the certificate of registration is also sent electronically to the bank.

Banks have been obliged to check the registration status of a foreign client in the Open and Publicly Available Information of the Unified State Register of Foreign Entities and, if no information is available in the register, to send an application for registration.

As a reminder, tax registration and tax payment are different processes. As the regulators have not yet provided any other explanations, we recommend to maintain a conservative stance and continue to file zero VAT returns for foreign entities registered with the FTS, even considering the transition to the tax payment procedure via a tax agent.

We will be happy to answer your questions!

The high unpredictability of external conditions significantly affects the ability to meet delivery deadlines, payment terms and other important contractual terms.

What can be anticipated and what options are available to mitigate the risks of the transaction?

In order to adapt quickly to changing conditions and protect your interests, it is advisable to include clauses in contracts in advance to help withdraw from the contract, suspend its performance or reduce the risk of penalties in the event of non-performance or partial non-performance due to objective circumstances with minimal loss to the parties.

Some examples of clauses that can be included in a contract:

• the obligation of the contracting party to notify the counterparty of its inclusion on the sanctions lists,
• the extension of the deadline for the fulfilment of obligations,
• currency clauses, e.g. a currency corridor clause,
• changes in the currency of payment under the contract,
• etc.

In each case, you should consider which terms and conditions would be most suitable for your contractual relationship.

We will be happy to answer your questions and assist you in formulating the necessary contract terms for your individual case.