One of the most common requests my law firm gets regarding Russia comes from a non-Russian company seeking assistance in setting up a Russian joint venture or a representative office. When we tell them that only rarely does it make sense to go into Russia with a joint venture or a representative office, they commonly respond either with surprise that there are other alternatives or by telling us how this is how their very well run competitor had entered the Russian market. When we explain that Russia now allows Wholly Foreign Owned Entities (WFOE), they quickly realize the benefits of not getting enmeshed with a Russian joint venture partner. The benefits of a WFOE over a Representative Office are more difficult to explain.

The purpose of this article and its accompanying chart is to briefly compare the advantages and disadvantages of establishing a business in Russia as a representative office or as a limited liability company (OOO) wholly-owned by a foreign entity. At the outset, however, it must be made clear that if your intention is to buy or sell goods in Russia, you cannot legally go in as a representative office. A representative office is limited to representing or marketing for a foreign owned entity. It is not allowed to conduct real business within Russia. In the past, many foreign companies would go into Russia as a representative office and then conduct business within Russia, but only because they had no other real choice. Companies have that choice now.

In deciding whether to establish a representative office or a WFOE, the investor must balance the convenience of a representative office with the ability to conduct business in Russia through a WFOE. A representative office in Russia can be opened and closed with relatively little formality. Since the office is not a Russian legal person, it is not subject to many of the burdensome regulations that apply to legally established Russian companies. Since a representative office cannot conduct business within Russia, the office is not subject to burdensome tax and reporting requirements. However, the business activities of a representative office are severely restricted to the point that it usually can do little more than act as a company's marketing arm in Russia. On the other hand, A WFOE entity in Russia is considered to be a legal person, and as such, it enjoys the both the rights and obligations of any other Russian company. Thus the scope of business operations for a WFOE in Russia is nearly always equivalent to that of any other Russian company. But a WFOE in Russia is also subject to the same taxation, reporting and company regulation requirements of any Russian company. The burden of these obligations for a WFOE must be balanced against the freedom to conduct real business in Russia in each individual instance where a company wishes to conduct business in Russia.