Over the years, countless strategies have been introduced to help business owners protect their assets. Dividing the business into multiple business entities controlled and owned by one holding company has taken center stage as one of the most effective ways to do so. This article will highlight how to mitigate risk using this popular, time-tested strategy for your business.
A holding company is a parent business entity, usually an LLC or corporation, that either entirely does not, or partially does, conduct business operations like the sale of products and services or the manufacture of goods. The purpose of a holding company is to "hold" the membership interests and controlling stock in other companies.
A holding company is validated when half the value of its outstanding stock is owned for more than half a financial year by the operating company. One of the pros of a holding company in Russia is that if the operating (subsidiary) company is declared bankrupt, the parent company is not liable for the loss if it did not sign the debt. The only disadvantage, in this case, is that the holding company would lose the invested money.
Types of Holding Companies in Russia
Russia is characterized by two forms of holding companies, which are pure holding companies and operating holding companies. Holding-operating companies conduct business along with the subsidiary company where the stocks are invested. On the other hand, pure holding companies are those where the investors are acting only through the subsidiary company where the stocks are invested. The subsidiary companies use the business term "operating companies." In most cases, the subsidiary companies of the holding company sell, manufacture or otherwise conduct business, while the parent company oversees operations.
Of the two fore-mentioned holding company characteristics, there are two types of accepted holding companies in Russia. These are the joint-stock companies and the limited liability companies. One limited liability company costs at least 10,000 rubles to be registered. The registration cost for one open joint-stock company, however, is at least 100,000 rubles.
How to set up a holding company in Russia
The primary regulating laws in establishing holding companies are:
▪︎ the Russian Civil Code.
▪︎ the Joint Stock Company Law.
▪︎ the Limited Liability Law.
The liability of the shareholders in these cases is limited to the amount of money they contributed at the business’s registration. This is one of the reasons Russia is an ideal destination for opening a holding company.
Limited liability holding companies have a limited number of 50 shareholders. Joint-stock companies, however, require a board of directors made of at least five members. Additionally, joint-stock companies' names must state that there are public entities.
It is important to note that registering a Russian holding company is no different from a local company. Registering a holding company in Russia requires the following steps:
1) The parent company needs to have the holding’s Articles of Association drafted and notarized.
2) Filing of the documents with the Trade Register in Russia, which then issues the Registration Certificate.
3) Holding companies need to register with tax authorities in Russia.
4) If the holding company has foreign employees, their hiring must be approved by the Russian Chamber of Commerce and Industry.
5) The company should also register with the Statistics Committee and the Social Insurance Fund.
The Controlled Foreign Companies regulations state that holding companies can benefit from certain tax exemptions. For instance, the holding company can benefit from the Russian double taxation agreements on the condition that the shareholders have residential permits in one of the signatory countries.
Also, a 13% corporate tax rate applies if the shareholder is a Russian resident, while a 20% corporate tax rate applies to foreign shareholders controlling Russian holding companies.
Share Capital Requirements
Russian holding companies can either register as joint-stock or private limited liability companies. Both fall under the same regulations imposed by the Company Law. As such, the share capital requirements are the same. However, the parent company decides whether additional amounts of money are needed to run operations in Russia.
Reasons to invest in an operating company in Russia:
》Tax optimization as holding companies in Russia have various tax incentive benefits.
》It allows you to track the financial transactions of your business.
》It allows for business growth and retaining of the company’s capital.
》As a business owner, a holding company in Russia establishes your international business image.
》Owning a holding company in Russia is excellent in that there is a small price for both administration and facilities-related costs.
》It safeguards the shareholders' interests as holding companies have enhanced privacy compared to other business types.
Six laws in Russia provide lucrative conditions for business owners setting up multinational companies:
1) There is a law for special administrative districts in Kaliningrad and Primoyre in which holding companies can run various operations.
2) Public and private companies can obtain the status of multinational or international holding companies in Russia when they invest in a holding company in Russia.
3) As already mentioned, international holdings have unique tax and currency regulations. Further, they obtain the right to register ships in Russia.
4)To become an international holding company, operations must occur in Russia and other countries. There should be an agreement with a Russian company to invest locally, or there should be a special investment concession contract, agreement, or a public-private partnership with the municipalities.
5) A Russian company is given six months to change its status into a holding company.
6) Holding companies that run operations under the special administrative zones benefit from tax resident status. Therefore, as tax residents, they are exempt from certain taxes that apply to companies not registered within the mentioned zones. In the new law, multinational companies are also allowed to undergo re-domiciliation procedures in Russia. This grants them the status of non-resident companies.
Additionally, the Russian Strategic Investments Law offers special regulations in these sectors:
• Industrial activities, such as natural monopolies (oil and gas pipeline) and the development of subsoil fields
• the nuclear industry,
• mass media.
• transport services (the aviation industry, airports, space activities, railroads, marine ports)
• military industry
In summary, a holding company in Russia is a good idea as it has several advantages, such as mitigating the risk of losing assets to creditors. The government of Russia has also taken measures to make investing in a holding company in Russia smooth and easy through several benefits such as some tax exemptions. Businesses use holding companies in all industries. They also are private as some of the most known publicly traded corporations are holding companies that the people buying their stock are unaware that they will be investing in the holding company rather than the operating company.