Undercover business

China has stormed into the ranks of the leading countries in terms of foreign investment in the Russian economy. According to independent research, China is the second-largest source of direct investments in Russia. The legal culture in China is very different from that in Russia and it is impossible to do business without knowing Russian law. Pepeliaev Group, a leading Russian law firm, has actively been working with Chinese clients since 2014, offering them the full range of legal services together with the support of a specialized department, the Chinese Desk. The firm has representative offices in Beijing and Shanghai and regularly organizes business missions to China. Over the years, the firm has developed specific strategies and practices for providing legal support to Chinese investors in Russia. Pepeliaev Group's leading experts explain what aspects Chinese entrepreneurs should pay attention to if they are interested in building a successful business in Russia.

Know your counterparty

ILYA BOLOTNOV, Partner, Head of Corporate Practice
One should start working with any counterparty in Russia by checking the information about it in public sources. It does not matter whether one is concerned with a large investment project or the signing of a contract in the context of everyday commercial activities.

Today, when you have the name of a company and you know its address, you can find out a lot of information, including: basic information about state registration, whether the company is involved in litigation (the number of disputes and their nature can indicate whether it is in a difficult financial position), whether it is faces a threat of prosecution by tax or other authorities, whether the company is in the process of reorganization, liquidation or bankruptcy, what licenses it has, and much more.

No project is possible without a check of the legal aspects of the company that is the object of investment. Typically, the most sensitive issues for investors are as follows: title to shares or membership interests in the company (if these are the subject matter of the transaction); title to property that is material for the company's activities; whether the company has a special right (license) to conduct certain activities or the threat of such a license being revoked in a case of non-compliance with the license conditions.

Such risks very often represent a deal breaker in a transaction or a reason for withdrawal from a project. After all, if there were a threat, for example, of a challenge to a manufacturing company's right to its main production facility, based on the conditions of previous transactions with the facility, the investor would hardly be likely to want to take a risk that may result in the loss of the business.

Often when we carry out due diligence of a company we also see many other traditional risks which are worth paying attention to: negligence of corporate procedures (e.g. the absence of annual meetings of shareholders); a lack of control over compliance with all terms (covenants) in financial contracts with banks (loan contracts); antitrust risks, which can result in huge fines calculated as a percentage of turnover, and many more.

All such situations in the transaction are manageable: there are ways to protect the investor from such undesirable consequences. The main thing is to detect the problem in time.

Tax "whitewashing"

RUSTEM AKHMETSHIN, Senior Partner, Head of Tax Practice
In recent years, the government has devoted enormous attention to attracting foreign investments. Several preferential regimes have been created: there are many ADZs (advanced development zones) and RIPs (regional investment projects), while huge territories in the Far East are covered by the special regime of the Free Port of Vladivostok. Among recent important initiatives, I would mention agreements for the protection and promotion of investments, which create what is known as a "stabilization clause" for investors. These offer guarantees of unchanged investment conditions and compensation of investors' expenses for the creation of infrastructure.

Every investment project is unique, and on each occasion that we help our clients navigate through complicated Russian legislation, we assess and find the best option for that particular investor.

A much more complicated issue that every taxpayer has to face is dealing with its suppliers and contractors, especially in such sectors as construction, logistics, agriculture and imports. Tax authorities have long been fighting to "whitewash" the market and often suspect good-faith taxpayers of a conspiracy or, at the least, of negligence in choosing a counterparty. As a result, taxes are imposed on a company that has nothing to do with "tax evaders", but simply has not been prudent when entering into a contract.

Last year, lawyers from Pepeliaev Group managed to defend the interests of a major Chinese producer of household appliances and prove in court that additional tax charges were unlawful, but winning a dispute with the tax authority is not always possible. With regard to these issues, it is vital to know not only the relevant provision of the law (which, incidentally, says almost nothing about bad-faith counterparties) but also how it is applied in practice. This requires experienced lawyers.

Failure to pay attention to this problem can lead to a serious increase, i.e. of 50-60%, in the cost of procurement, through taxes and penalties that must be paid for suppliers and contractors.


NATALIA STENINA, Partner, Head of Real Estate and Construction Practice, Head of Environmental Group
Over the last year, environmental issues have come to the fore: this is evidenced by dynamic changes in legislation and the evolution of litigation practice. For business, these changes mean tougher environmental requirements, greater scrutiny from regulators and an increased financial burden.

The harsh rhetoric of the regulatory body Rosprirodnadzor towards unscrupulous users of natural resources, coupled with the increased focus of the country's leadership on environmental issues, suggests that the influence of the regulator has increased.

If violations are identified, Rosprirodnadzor may not only impose administrative fines on a company and its officers, but may also suspend the activities of the enterprise. In addition, the regulator is authorized to assert claims to recover the amount of damage to the environment, and the amount of such claims may exceed the amount of administrative fines by many times.

Companies often underestimate environmental risks and think about regulating them when a crisis has already occurred. Such an approach can result in significant losses for business.

It is much more effective to be proactive: to monitor changes in environmental legislation and analyze internal processes. Building an environmental risk management system (an environmental compliance system) is becoming a trend for business. Such a system not only helps businesses successfully to pass Rosprirodnadzor inspections, avoiding sanctions, but also increases trust in business.

Another trend in environmental law is increasing the liability of business for environmental damage. The most widespread cases are pollution of the environment as a result of substances leaking into water and soil. Unauthorized landfills are in second place. Environmental damage can be compensated in two ways: eliminating the damage by oneself or paying monetary compensation. The choice of compensation is up to Rosprirodnadzor, which prefers to demand compensation in monetary terms. A prime example is a number of recent cases involving leading Russian industrial companies, which have been forced to pay unprecedented amounts running into the hundreds of billions of roubles.

Another change relates to the new concept of Extended Producer Responsibility (or EPR), which essentially means that producers and importers who manufacture or import certain goods or packaging into Russia must ensure that these are disposed of at the end of the product's life cycle. Alternatively, the manufacturer or importer may pay an environmental levy. Most likely, starting from 1 January 2022 there will be a regulation according to which 100% of packaging placed on the market must be recycled (the current rate is 10% - 45%). Producers/importers of packaging will remain responsible for paying the relevant charges or for disposing of that packaging. As for goods, the recycling rate is to be gradually increased, but by at least 10 % per annum.

The environmental levy is proposed to be calculated based on a double recycling rate (at present, a single recycling rate applies) in order to encourage manufacturers and importers to comply by themselves with the rules in question.

The source: Russian business guide

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