CORPORATE AND BUSINESS

LAW
Topic 5. Foreign legal entities
FOREIGN LEGAL ENTITIES
INTRODUCTION:

Connecting factors are necessary to determine the nationality of a company (I)

There are several types of connecting factors to determine the applicable national
law to a company.

The two main ones are:

-the “statutory seat” of the firm (the place where the company is registered)

-the “real seat” of the firm (the place where the company has its central
administration and carries out its main business)
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INTRODUCTION (2):

According to the Russian legal system, the nationality of a company is determined

by its place of registration.

Once the nationality of the company has been determined, a foreign company may
choose to carry out economic activities in the Russian Federation. It can do so
through various legal vehicles (II) such as a :

-representative office
-branch
-subsidiary
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INTRODUCTION (3):

Having chosen one of these legal forms, the foreign company can make various types
of investments in the Russian Federation (III) such as:
-equity participation in organizations created jointly with legal entities and individuals
of the Russian Federation;
-the creation of organizations wholly owned by foreign investors, as well as
branches of foreign legal entities;
-acquisition of organizations, buildings, constructions, interests in organizations,
shares, stakes, bonds and other securities, as well as other property, may be owned
by foreign investors which under the laws of the Russian Federation and so on.

These investments are protected by principles of international investment law (IV)

which a foreign investor can refer to before a Russian court.
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I. Systems of criteria (theories) for determining the
nationality of a foreign legal entity.

As said above, there are two main types of system of connecting factors
between a country and a company to determine its nationality :

-the “statutory seat” of the firm (the place where the company is
registered)

-the “real seat” of the firm (the place where the company has its central
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I. Systems of criteria (theories) for determining the nationality of a foreign legal entity (2)

In practice, there’s quite a big diversity among countries of systems of connecting factors.

-In Europe, some states only recognize the existence of a company when its central administration and place of
incorporation are in the same Member State (ex. Germany).

-For other European countries, the place of incorporation, of central administration and of main activities of
business should be in the same MS for the latter to admit the existence of the company (ex. France).

-In other countries, the place of incorporation is the main connecting criteria between the MS and the company (ex.
UK).
-in another group of states, a company’s existence can be recognized by the law of these member States as long as
the company is registered there (ex the Netherlands) despite the fact that its main administration (headquarters) is
based in another EU member State ).

According to the Russian legal system, the nationality of a company is essentially determined by its place of
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II. Investments carried out by foreign entities in the Russian Federation
Definition of the notion of “foreign investment” in the meaning of Russian law:
“investment of foreign capital in an object of entrepreneurial activity in the territory of
the Russian Federation” [Article 2 N 160-FZ Federal law on foreign investments]
Definition of a “direct foreign investment” : the acquisition by a foreign investor of at
least 10 per cent stake, stakes (contribution) in the authorized (aggregate) capital of a
commercial organization set up or being set up on the territory of the Russian
Federation in the form of an economic partnership or company under the civil legislation
of the Russian Federation;
A foreign investor can be:
-a foreign citizen whose civil legal capacity and competence is determined by the
legislation of the state of his/her citizenship and who is entitled under the legislation of
the mentioned state to invest in the territory of the Russian Federation
-a foreign legal entity the civil legal capacity of which is determined by the legislation of
the state where it has been instituted and which is entitled under the legislation of the
mentioned state to invest in the territory of the Russian Federation
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II. Investments carried out by foreign entities in the Russian Federation (2)
Types of investment
Right of foreign investors settled in the RF to invest in:
-equity participation in organizations created jointly with legal entities and
individuals of the Russian Federation;
- the capital of legal entities registered in the Russian Federation (e.g.
subsidiaries)
- organizations, buildings, constructions, interests in organizations, shares, stakes,
bonds and other securities, as well as other property, may be owned by foreign
investors which under the laws of the Russian Federation;
-in rights to use land and other natural resources;
-property and property rights.
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III. Legal forms adopted by foreign legal entities operating in the RF
A foreign company has the possibility to carry out an economic activity in the
Russian Federation through at least one of the following three legal forms of
representation:
-the representation office (A)
-the branch (B)
-the subsidiary (C)
We will examine each of those three legal forms in turn.
FOREIGN LEGAL ENTITIES
III. Legal forms adopted by foreign legal entities operating in the RF
A. Representative office (“Представительство”)
 Definition: a separate subdivision of a legal entity located outside its location, which represents the interests
of the legal entity and protects them.
 Function: can only conduct “preparatory and auxiliary” activities for the head office located abroad.
 Modalities of creation:
-should be accredited by the Federal Tax Service of Russia (acting as the accreditation agency since 1 January
2015)
-amount of the accreditation fee : RUB120,000 (USD1,900).

 Legal status:

-The representation offices (…) shall not be legal entities (article 55.3 of the civil code of the Russian Federation).

-A legal entity shall be recognized as an organization (…) which is answerable by its obligations with this property
and may on its own behalf acquire and exercise the property and the personal non- property rights, discharge
duties and come out as a plaintiff and as a defendant in the court (article 48.1 of the civil code of the Russian
Federation)
FOREIGN LEGAL ENTITIES
III. Legal forms adopted by foreign legal entities operating in the RF
A. Representative office (“Представительство”) (2)
Practical case No20:
“Moscoop is the representative office of Sipa, a French photo agency registered and based in Paris.
Moscoop sold the photos taken by Yuri Kolmachev, a professional photographer, to Paris Match, a
French glossy magazine after he had asked Moscoop to stop representing him. Furious, Mr Kolmachev
consults you to find out what his chances of success are in the event he files a lawsuit against
Moscoop”.
You should resolve this practical case using the methodology explained on slide 7 of the presentation
on “legal entities” (topic 1 part II)
Your answer should include the following elements:
Question of law:
Major rule:
Minor rule:
Conclusion:
FOREIGN LEGAL ENTITIES
III. Legal forms adopted by foreign legal entities operating in the RF
A. Representative office (“Представительство”)(2)
Practical case No20:
Question of law: can a physical person file a lawsuit against the representative office in the Russian Federation of
a foreign company?
Major rule:
The legal entity shall be recognized as an organization (…) which is answerable by its obligations with this
property and may on its own behalf acquire and exercise the property and the personal non- property rights,
discharge duties and come out as a plaintiff and as a defendant in the court (article 48.1 of the civil code of the
Russian Federation)
The representation offices (…) shall not be legal entities (article 55.3 of the civil code of the Russian Federation)
Minor rule: in the case at end, Moscoop, the representative office of Sipa, a photo agency registered and based
in France sold the photos of Yuri Kolmachev to a French magazine without the photographer’s consent.
Conclusion: being a representative office in the Russian Federation of a foreign firm, Moscoop doesn’t have the
legal capacity to be sued in a Russian court.
Instead of trying to sue Moscoop, a representation office, Mr Kolmachev’d better file a lawsuit on the French soil
against Sipa, Moscoop’s head office in France, for selling his photos without his authorization and against Paris
Match for publishing them.
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III. Legal forms adopted by foreign legal entities operating in the RF
B. Branch (“филиал”)
Definition : a separate subdivision of a legal entity located outside the Russian Federation
and carrying out all its functions or a part thereof, including functions of representation
Function :
-can conduct all of the activities usually conducted by the head office, including signing
sales contracts.
Modalities of creation:
-should be accredited by the Federal Tax Service of Russia (acting as the accreditation agency
since 1 January 2015)
-amount of the accreditation fee : RUB120,000 (USD1,900).
Liability :
-not considered as a Russian legal entity.
-responsibility of the foreign head office (i.e. the headquarters of the firm registered
abroad) for the branch’s obligations and actions.
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II. Legal forms adopted by foreign legal entities operating in the RF
B. Branch (2)
Practical case No21:
“Andrei Panov, the director of BP Russia, a Russian branch of British Petroleum, an
international oil company, wants to sign a contract in Moscow with Halliburton, a
consulting firm specialized in the extraction of oil and gaz. Can he do so?”.
You should resolve this practical case using the methodology explained on slide
No6 of the presentation on “legal entities” (topic No2)
Your answer should include the following elements:
Question of law:
Major rule:
Minor rule:
Conclusion:
FOREIGN LEGAL ENTITIES
II. Legal forms of representation of a foreign company in the Russian Federation (6)
C. Subsidiary (“дочерняя компания”)
Definition: an independent legal business form which operates under the regulations imposed by the
Russian Company Law.
Most common legal forms of subsidiary in the Russian Federation:
-Limited Liability Company (LLC)
-Joint Stock Company (JSC).
Practice: Foreign companies often use LLCs to conduct their wholly-owned business in Russia.
Limitation: However, a solely-owned legal entity (i.e. one that would be 100% owned by the legal entity)
cannot establish another LLC or JSC as a subsidiary.
Legal status:
-Although it usually represents the interests in the Russian Federation of a foreign mother company, the
subsidiary is incorporated there and is therefore considered as a legal entity in RF.
-Legal entity shall be recognized as an organization (…) answerable by its obligations with this property and
may on its own behalf acquire and exercise the property and the personal non- property rights, discharge
duties and come out as a plaintiff and/or as a defendant in the court (article 48.1 of the civil code of the
FOREIGN LEGAL ENTITIES
II. Forms of representation of a foreign company in the Russian Federation (7)
C. Subsidiary (“дочерняя компания”) (2)
Practical case No22:
AO OPT Bank, a subsidiary in the Russian Federation of the OPT Group, a large
Hungarian financial institution based in Budapest, didn’t properly execute its
contract with Rossbankomat, one of its suppliers. Can Rossbankomat file a lawsuit
against AO OPT Bank?”
You should resolve this practical case using the methodology explained on slide 7 of
the presentation on “legal entities” (topic No1)
Your answer should include the following elements:
Question of law:
Major rule:
Minor rule:
FOREIGN LEGAL ENTITIES
II. Forms of representation of a foreign company in the Russian Federation (8)
C. Subsidiary (“дочерняя компания”) (3)
• The question of the liability of the parent company for the debts of its subsidiary
Is a parent company obliged to honour the debts of an insolvent subsidiary?
According to the principle of bankruptcy remoteness, the different components of a group have a
distinct legal personality which forbids to hold one of these components liable for the behavior
of the other components.
Subsequently:
- a parent company is not required to finance a subsidiary to enable it to fulfill its obligations and
continue its activity.
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II. Forms of representation of a foreign company in the Russian Federation (9)
C. Subsidiary (4)
• The question of the liability of the parent company for the debts of its subsidiary (2)
This principle is subject to an exception if the third party, which actually agreed with
subsidiary, thought it was also contracting with its parent company (or vice versa). This
exception is just an application of the “appearance theory” according to which the
parent company which gives the impression that it is a party to the contract (signed by
the subsidiary with a third party), for example by participating closely in its conclusion,
execution, or even termination, is also liable towards the co-contracting third party, even
then that the contract has been signed by its subsidiary.
The same applies if the companies of one group present themselves to a third party as
a single entity, acting under the same logo, sharing the same telephone number, etc.
However, the recourse to the “appearance theory” is only effective if the third party gives
a proof that it has been legitimately deceived by the behavior of the subsidiary and its
parent company
FOREIGN LEGAL ENTITIES
II. Forms of representation of a foreign company in the Russian Federation (10)
C. Subsidiary (5)
• The question of the liability of the parent company for the debts of its subsidiary (3)
Practical case No23
The top management of Tractor Belaruss JSC, a Belarussian company specialized in the production of lorries, intends to
organize both the production and sale of the company’s tractors in Belaruss. To this end, they have created and registered in
the Russian Federation a subsidiary, the Tractor Belaruss Russia LLC. On the occasion of its launch on Russian territory, Tractor
Belaruss Russia LLC wishes to place a large order of spare parts with John Deer, a major US producer of spare parts for
tractors. After several weeks of negotiations between these two companies, attended by a representative of Tractor Belaruss
JSC, the Russian subsidiary purchases spare parts worth 10 million euros. However, a year later, Tractor Belaruss Russia LLC is
experiencing some financial difficulties and cannot honor its debts towards John Deer. Informed that is being placed under a
liquidation procedure, John Deer's legal department consults you to find out whether there’s a way to compel Tractor Belaruss
JSC to settle Tractor Belaruss Russia LLC’s debts.
You should resolve this practical case using the methodology explained on slide No7 of the presentation on “legal entities”
(topic No1)
Your answer should include the following elements:
Question of law:
Major rule:
Minor rule: