Basics of the Russian Civil Law System

Civil and Corporate Legislation

Civil legislation of the Russian Federation is based on the Civil Code (Parts I, II and III) (the fourth Part should be adopted soon) of the Russian Federation of 1994. Pending adoption of Part IV of the Civil Code, some parts of the Civil Code of the Russian Soviet Federal Republic of 1964 and Civil Code of the USSR of 1991 remain in force.

Within the decade Russia has developed comprehensive corporate legislation covering all major issues of corporate activity.

Tax Legislation

Russia is currently in the midst of significant tax reform. In August 2000 Part II of the Tax Code was signed into law and became effective in January 2001. Many tax regulations are in transition. The main taxes are:

• Profit Tax. Profit tax is levied on the enterprise's gross profit. The general tax rate is 24 per cent of gross profit with some exceptions.
• Value Added Tax (VAT). VAT is calculated on the sales value of goods (services, works) at a general rate of 18 per cent with certain exceptions. Imported goods are also subject to VAT.
• Excise Tax. Excise tax is levied on the sale or importation of certain goods (alcohol, tobacco, jewellery, cars, oil, gas, and other). The tax rate varies for each product.
• Land and Property Taxes. Land and property taxes are levied by the local authorities at a rate depending on the location of the property.
• Personal Income Tax. Personal income tax is calculated at a flat rate of 13 per cent.

Property, Currency, Custom and International Legislation

The Constitution gives Russian citizens general rights to own, inherit, lease, mortgage and sell property; however, there are many gaps and ambiguities in the legislation that implements these rights. A new Land Code came into force on 29 October 2001 regulating the use and ownership of municipal and industrial land. Agricultural land is specifically excluded from the jurisdiction of the Land Code and is regulated by a separate federal law on agricultural land, which came into force on 27 January 2003. The law on agricultural land provides that agricultural land cannot be owned by foreign legal entities or individuals or Russian legal entities if more than 50% of their charter capital is owned by foreigners.

Russia has extensive and complex currency control legislation. The Russian currency, the rouble (RUR), is the only legal tender in Russia. There are two types of currency operation according to the Law of the Russian Federation On Currency Controls of 9 October 1992:

• Current operations: includes import/export contracts with deferral of payment for less than 90 days, loans not exceeding 180 days, and some other transactions.
• Capital operations: includes direct and portfolio investments, import/export contracts with deferral of the payment for more than 90 days, loans exceeding 180 days and some other transactions.

Capital operations generally require permission from the Central Bank of the Russian Federation (CBR). Non-residents of the Russian Federation may have both foreign currency and rouble accounts to service their operations in Russia.

On 15 December 2003 the President of the Russian Federation signed the new version of the Federal Law On Currency Regulation and Currency Control, which is to replace the existing version of the law. Most of the provisions of this law will come into effect 6 months after its official publication, (i.e. in June 2004).

This law contains an exhaustive closed list of capital currency operations, the performance of which may be regulated by the Russian Government or the Central Bank. Contrary to the previous situation the law changes the main principle of Russian currency control from "everything which is not allowed is prohibited" to an opposite position of: "everything which is not prohibited is allowed". Instead of specific permissions for certain types of "capital operations" the Law establishes a liberalised approach to such operations (such as mandatory reservation requirements, "special" accounts to conduct "capital operations", etc.).

The mandatory conversion requirement in relation to foreign currency export proceeds will remain the same (a maximum level of 30% with the right of the Central Bank to establish a lower percentage).

Many of the currency control restrictions established by the Law are due to be abolished as of 1 January 2007.

The main legislative act governing the customs legislation of Russia is the Customs Code of the Russian Federation of 18 June 1993, which is in force until 1 January 2004. It will be replaced by a new Customs Code, which was signed into law in 2003. Russian import tariff rates vary from 0 to 100 per cent, depending on the imported item. The tariff rate for cars depends on the year of production of the imported car and varies from 1.4 to 3.2 EUR per cubic centimetre of engine volume. The import tariff rates for tobacco vary from 5 to 30 per cent. In addition to import tariffs, VAT and selective excise tax are also applied to imports. Import licences are also needed for certain types of goods ( alcohol, etc).

The Constitution states that general principles of international law and international treaties are part of the legal system of the Russian Federation. If Russia is a party to an international treaty that contains provisions contradictory to the provisions of the Russian legislation, the provisions of the international treaty prevail.

Foreign Investment Legislation

While the encouragement of foreign investment is a stated Russian government priority, there have been difficulties in creating a stable, attractive investment climate. Foreign investors' concerns about the legal system, corruption and taxation are key factors affecting foreign investment, rather than any explicit express restrictions imposed by the government.

Foreign Investment Law

The main legislative act governing the sphere of foreign investments is the Law of the Russian Federation On Foreign Investment in the Russian Federation of 9 July 1999 (Foreign Investment Law). The Foreign Investment Law provides the statutory basis for the treatment of foreign investment. The Law states that foreign investors and investments shall be treated no less favourably than domestic investments, with some exceptions. Such exceptions may be introduced to protect the Russian constitutional system, the morality, health and rights of third persons or in order to ensure state security and defence.

Russian legislation may also introduce special rights promoting foreign investments. The Law permits foreign investment in most sectors of and in all forms available in the Russian economy: portfolios of government securities, stocks and bonds, and direct investment in new businesses, in the acquisition of existing Russian-owned enterprises, in joint ventures, etc. Foreign investors are protected against nationalisation or expropriation unless this is provided by the federal law of the Russian Federation. In such cases, foreign investors are entitled to receive compensation for the investment and other losses.

Restrictions on Foreign Investment

Currently, there are relatively few explicit restrictions on foreign direct investment. Foreign ownership in the natural gas monopoly, Gazprom, is limited to 14 per cent. Legislation limits foreign investment in the electric power company, Unified Energy Systems (UES), to 25 per cent.

The Russian Law On Insurance of 27 November 1992 established a ceiling of 15 per cent on the total amount of foreign investment in the insurance industry of the Russian Federation as a percentage of the total insurance capital in Russia. Insurance companies in which foreigners own more than 49 per cent of the Charter Capital may not engage in certain types of insurance business, including life assurance business.

The CBR has the right to use reciprocity as a criteria to specify the types of business that foreign banks may be licensed to operate in Russia, and is permitted to impose a ceiling on the total amount of foreign bank capital as a percentage of the total bank capital in Russia. At present, foreign banks' share of the total capital bank is well below the 12 per cent ceiling set by the CBR.

International Treaties

Russia is party to a number of international treaties, which are aimed at the protection of foreign investments:

• Bilateral investment treaties: these treaties generally guarantee non-discriminatory treatment for foreign investments and investors in Russia, provide for compensation to be paid for expropriation or nationalisation, and allow disputes to be referred to international arbitration. Russia holds such agreements with the United Kingdom, Germany, Italy, Spain, the Netherlands, Finland, France, Switzerland and others. The treaty entered into with the United States is waiting to be ratified.
• Treaties for the avoidance of double taxation: these treaties generally provide relief from double taxation, guarantee non-discriminatory tax treatment and provide for co-operation between the tax authorities of the respective signatory countries. Russia has such agreements with Austria, the United Kingdom, Greece, Denmark, Ireland, Spain, Italy, Canada, Cyprus, the Netherlands, the United States, Germany, France, Switzerland and many other countries.

For further information please contact David Griston:

[email protected].