Registering legal entities: some clarification is still needed (AmCham News. American Chamber of Commerce in Russia. March-April 2002)

Matvey Levant, managing partner Levant & partners law firm

New legislation and long-anticipated amendments to some major laws, which significantly increase the legal protection for business­es, have recently been enacted in Russia.

Since 1994, the process of registering legal entities has been regulated by the Ordinance of the President of the Russian Federation. Therefore, the introduction of the federal law, On Registration of Legal Entities, has been greatly anticipated by everyone – from law firms to the govern­ment registration authorities.

The law, expected after part I of the Civil Code, has finally been enacted and takes effect July 1. However, the law stipu­lates just a general algorithm of state reg­istration rather than a list of specific steps required to complete state registration.

Let’s consider in detail some of the innovations introduced by the law. The law stipulates that state registration is conduct­ed by a federal authority (registration body). Unfortunately there is no clear indi­cation as to what particular body will carry out this function. There are widely-circulat­ing rumors that the Tax and Duties Ministry is prepared to take on these functions. On the one hand, this seems quite reasonable, as state registration and the registration of a taxpayer will be done at the same window. On the other hand, it may result in the “monopolization” of the state registration process by tax authorities. It is important to note, that there is not a “one window” prin­ciple stipulated by the law. Does that mean that only two stages are united in its multi­stage process, and registration with non-budgetary funds will have to be carried out as before? It should be emphasized that if the Tax and Duties Ministry is responsible for registration, then additional changes to the Civil Code will be necessary, as it stipu­lates that legal entities must be registered by agencies of the Justice Ministry.

The law provides for a state register containing information on the creation, reorganization and liquidation of all legal entities in Russia, as well as the name and position of those authorized to represent a legal entity without power of attorney. With the opportunity to obtain data on potential counter-parties, regardless of where they are located in Russia, the risk of entering into relations with an unfair partner should be diminished.

The register also contains data on licenses obtained by a legal entity, provided by the licensing body within five business days from when the license is granted.

In an attempt to make the law reflect actual practice, it now stipulates that regis­tration should be completed within five business days, instead of the current three-day term. However, due to the extensive volume of work in all government agen­cies, regardless of what agenq’ handles registration, it will be difficult for the extended deadline to be met either.

The list of documents required for registering a newly created legal entity becomes shorter. A literal interpretation of the law would show that there are no requirements, for example, to present a charter of the founder or some of the other documents that are currently required.

The law also stipulates that if a legal entity is voluntarily liquidated, it should send a notice to the registration body in order to obtain the consent of the latter.

The law’s closing provisions arc cer­tainly meant to make things smooth for controlling bodies. Pursuant to such provi­sions, a duly authorized representative of a legal entity registered before the law’s enactment shall, within six months of the date of enactment (before Dec. 1, 2002), provide the registration body with information set forth by the law. Failure to comply is considered grounds for the court to pass judgment on the liquidation of such legal entity on the basis of an application filed by the registration body The compulsory liquidation of non-existent companies will help to decrease a risk for counter-parties and facilitate the work of controlling and supervising bodies.

In general, the introduction of the above amendments and additions will considerably simplify the existing system of registration of legal entities, which will allow Russian businesses and foreign investors to work more efficiently on the Russian market.

It is interesting to note a correlation between the law and other new legislative acts. The federal law On Opposition to Money Laundering, which came into effect on Feb. 1, stipulates that almost all large operations (exceeding 600,000 rubles) will fall under mandatory control. For exam­ple, when an individual invests cash into the charter capital of an entity, such investment generates a number of conse­quences. The registration body must inform the newly created Committee on Financial Monitoring of the Russian Federation of this operation. In turn, if the CFM discovers any facts confirming money laundering, it must inform relevant bodies in order to initiate criminal proceedings.

It is worth noting that since Feb. 1, banks must inform the CFM on amounts transferred to its client’s account. This will certainly provide for maximum transparency of financial and business operations. However, I think that this is a direct violation of the basic principles of confidentiality for these institutions.

Thus, the new laws facilitate the build­ing of relations between legal entities and the state, where Russian business becomes more transparent. The enactment of such laws will certainly increase the actuality of Russia’s membership in the WTO. However, the efficiency of the new laws should be judged by the process of their application.