How to structure an R&D team in Russia
This is the second post in a series. The first one explains why it’s time to build software in Russia — check it out.
So, you’ve considered all the pros and cons and finally decided to build your R&D team in Russia. What are the next actions you should take?. In this post I will give you some quick tips on how to structure the relationship with the team from a legal point of view to avoid risks from the beginning.
The right setup depends on many factors. The most important ones are:
- Purpose. What do you want to get out of your Russian R&D team? What competences do you want to have here except software development? Are you interested in Russia as a market for your products?
- Size. How many engineers do you need? Do you need a team working together from one location or are you OK with a bunch of independent freelancers working remotely?
- Time. Do you need to implement a project within a limited time frame or are you looking for something longer term ?
Forms of doing business
Like in most other countries, in Russia there are many forms of doing business. I will mention only the ones that are appropriate for an R&D office of a foreign company. I will also provide a quick description for each form, so that you’re able to choose the right one for you business by answering the questions about its purpose, size and time frame.
The simplest form of doing business here is to deal directly with individuals. This way you don’t interact with the Russian state at all, you just sign contracts with your developers and pay them salaries.
This method is simple and it works, but it has a drawback: you are violating Russian laws. According to the federal laws on mandatory pension insurance, social insurance and mandatory insurance, any organization must pay fees to pension, social and medical insurance funds for each person employed in the Russian Federation. Foreign companies are not an exception.
What implications does this violation have? Well, the KGB won’t hunt for you. Basically there are no precedents of a foreign company facing prosecution because of violating these laws. If you are not working on the Russian market, you are safe enough. If you consider working in Russia, some other setup may be better.
The other important thing to note about working with individuals is that your developers would have to pay taxes by themselves. In Russia it is common for an employer to be a tax agent paying all the employees’ taxes, including personal ones. If you employ individuals to a foreign company, make sure they are paying taxes by themselves.
Overall working directly with individuals in Russia is a lightweight and cost effective setup. It is a good fit when you are working with independent freelancers on short-term projects. It won’t be the best choice if you need to have a team, rather than individual developers, or if you plan to do sales in Russia. It’s also not the ideal setup if you need a more stable and longer term relationship with your R&D team here.
Any person can register as an individual entrepreneur in Russia. This is not a separate legal entity, but a special status of a person that allows them to practice business activities. An individual entrepreneur can do practically anything that a company can do. There are exceptions — for example he cannot offer financial services — but these are not applicable to our case.
This form of doing business has lots of advantages. An individual entrepreneur is exempt from personal taxes — he has to pay only business taxes, which tend to be pretty low. An individual entrepreneur can employ other people, pay salaries, taxes and fees for them, sell services to a foreign company, purchase services from other Russian contractors, rent an office, etc.
As usual, the drawbacks are the flip side of the advantages. An individual entrepreneur has to not only a be team leader and developer, but also has to understand the basics of accounting and law, and be able to interact with state authorities. There is no distinction between an individual entrepreneur’s business and his personal property, so he should be prepared for unlimited liability. The entire setup depends on this person, so you need to have a high level of in to him. You’ll probably agree that such a person is hard to find.
I would recommend to work with an individual entrepreneur if you know a reliable developer in Russia, he is able to be a team leader and is OK with doing some administrative work. This setup is good for small and medium sized teams. It can work in the long term — the main risk is associated with the team leader you are working with because you cannot easily replace him with someone else.
Limited liability company
A limited liability company or LLC (OOO in Russian) is the most widespread form of a corporate legal entity here. It is quite similar to a Finnish OY or LLC in any other country in the world. The idea behind it is separating actives and related liabilities into a legal entity under the control of its owners.
Registering and administrating an LLC in Russia is rather simple, especially when it has one founder. Creating an LLC is a bit more difficult than registering an individual entrepreneur, but the whole process can be done within two weeks.
From the risk analysis point of view an LLC is the safest setup. You can easily change any person working at the company, including its managing director. All the liabilities are “packed” inside the LLC and you won’t be personally liable for them unless you use this limitation maliciously.
Overall the LLC is the most comprehensive setup. It is a good fit for medium and larger teams and it works in the long term. For short term projects and not so big teams it may be overkill.
Branch of a foreign company
The last option for consideration is the branch of a foreign company. This is not a legal entity by itself, but a form of registration of a foreign company in Russia. By creating a branch you simply tell the Russian authorities: “Hey, my company is going to work in your country!”
All the branch activities are performed on behalf of the foreign company it represents. It is not very useful for an R&D office, but will help if you are doing sales in the Russian market. Another bonus is that a branch can pay salaries in your home currency, not in rubles, thus avoiding currency risks.
The main disadvantage of the branch of a foreign company is thelack of liability limitation. There is no legal barrier between your company and its branch. In case of conflict with a contractor or an employee, your company is the one who will go to Russian court and pay for damages.
The other drawback of this business form is that it does not allow using the so called Simplified Taxation System. A branch must use the General Taxation System, which means much more complex administration and usually a higher tax load.
Generally I would not recommend creating an R&D office in Russia as a branch of a foreign company. This form is a better fit for a sales office. The only case a branch may be used for hiring developers is when you already have it for doing sales and decide to temporarily place R&D there.
Unless you are Russian and visit the country regularly, you would need help with running an R&D office here. Depending on your needs and the business form of choice you are likely to need some or all of the following services:
- Team recruitment
- Business registration, accounting and tax administration
- Office maintenance
There are two approached you can take here: you can either use different service companies or choose one outstaffing partner.
The advantages of working with multiple service companies is all about control: you can choose a separate provider or providers for each service and switch them in and out as you see fit. Naturally, this way you can optimize costs and fine tune other aspects of the R&D office.
Not surprisingly, the higher level of control means a high level of responsibility and management overhead. You would have to choose service companies by yourself, manage their work and collaboration. In order to do this, you would have to visit your Russian R&D office regularly and/or have a dedicated manager or a small management team for your Russian operation.
Having an outstaffing partner is a simper option. In this case you choose one provider who will run the R&D office, i.e. do recruitment, administration and office maintenance. It means less management overhead on your side, but less control as well.
The most important thing about working with an outstaffing partner is avoiding lock in. Changing a single partner is always harder than changing one out of multiple service providers, but you should make sure it is possible and clearly understand what steps you need to perform to do it. The best way to go about this is to agree on these steps with your partner from the beginning and describe them in your agreement.
As a rule of thumb, you should choose to go with multiple service providers only if you really know what you are doing. You should either have strong Russian connections or plan to go big from day one. Otherwise I would recommend starting with a trustworthy outstaffing partner making sure you can change or switch to multiple service provider whenever you like.
Before proceeding to signing agreements it is always wise to dig a bit deeper into the subject. Here are the links to the Big Four reports on doing business in Russia. They are mostly duplicating each other, so I would recommend to read though just one of them:
- Doing business in Russia 2015 by Deloitte
- Doing business and investing in the Russian Federation 2015 by PricewaterhouseCoopers.
- Doing business in the Russian Federation 2014 by Ernst & Young
- Doing Business in Russia: Your Tax and Legal Lighthouse 2012 by KPMG
Check out the first post in the series to understand why it’s time to build software in Russia. In the next posts I will describe the main Russian tech hubs for you to choose the right R&D office location and give you some tips and tricks about optimizing the costs of running an R&D office here. Follow the Toughbyte Blog or me on Twitter to stay up to date!