6 January 2005
The commercial laws of The Russian Federation. Part 2. Traders and Non-Traders

Traders and Non-Traders.

a. Definition of Traders.

The concept of “entrepreneurial activity” is the closest in Russian law to the concept of traders or merchants. This concept derives from the type of the activity in which the person is engaged. Entrepreneurial activity is defined as “an independent activity carried out at own risk and directed at the systematic realization of profits from exploiting property, selling goods, performing works, or rendering services.” The definition of an entrepreneur extends to commercial organizations as well as to individual entrepreneurs (solo businessman).

Commercial organizations can only be formed in one of the corporate forms stipulated by the RF Civil Code (i.e. partnerships, companies, manufacturing cooperative). Their status is governed by the RF Civil Code and special legislation (see infra for more details).

Individual entrepreneurs are individuals conducting entrepreneurial activity without incorporation of a legal entity. According to Art. 23 (4) of the RF Civil Code, rules governing entrepreneurial activity of commercial organizations also apply to individual entrepreneurs.

Non-commercial organizations may also perform entrepreneurial activity, but only to the extent that it corresponds to the goals for which they were founded.

b. Registration.

Registration of entrepreneurs is mandatory. Commercial organizations and most non-commercial organizations come into existence at the moment of their state registration. The registration system is stipulated by the RF Civil Code and is similar for both individual entrepreneurs and commercial organizations.

The registration procedure in the state bodies is stipulated by Federal law On State Registration of Legal Entities and Individual Entrepreneurs of 8 August 2001 No.129-FZ (as amended). This Law establishes the procedure for registration and general provisions for maintaining the State Registers of legal entities and individual entrepreneurs. Legal entities and individual entrepreneurs are registered upon filing a required set of documents with tax authorities (acting as companies’ registrar) at an individual entrepreneur’s domicile or at a place where an executive body of a corporation resides. The procedure of registration is of a reporting nature; the exhaustive list of reasons for a refusal is stipulated by the law (Art. 23).Unless there are any reasons for refusal tax authorities are obliged to enroll a legal entity or an individual entrepreneur in the State Register.

For certain types of commercial organizations the law sets the specific registration procedures. For instance, banks are registered under the decision of the Central Bank of the RF. For foreign entities, doing business in Russia, separate corporate registration is required only in case these entities establish a separate subunit (a branch and/or a representative office, or a subsidiary) on a Russian territory.

An individual carrying out entrepreneurial activity without registration may nevertheless be treated by a court as an entrepreneur. In such a situation, the court has discretion to apply rules on obligations in the course of entrepreneurial activity to the actions of the individual (in particular strict liability) regardless of registration (Art. 23 of the RF Civil Code). At the same time, Article 171 of the RF Criminal Code of the Russian Federation provides a penal sanction and Article 14.1 of the RF Code On Administrative Offences provides administrative liability for conducting entrepreneurial activity without registration or permission (license) when such permission is required, if certain qualifying circumstances exist.
Apart from state registration, which is required to establish corporate status and/or status of an individual entrepreneur, persons engaged in entrepreneurial activity must register with fiscal bodies to obtain a tax ID number (Art. 83 of the RF Tax Code). This applies to foreign businesses and solo businessmen operating in Russia as well. Evidence of such registration is required to open bank accounts (Art. 86 of the RF Tax Code), carry out customs clearance, and conduct certain other operations. A taxpayer identification number (INN in Russian transcription) is assigned to each such entity and individual.

c. Peculiarities of Entrepreneur’s Legal Status.

State registration alone is not always sufficient to allow a business to perform entrepreneurial activity. Certain kinds of entrepreneurial activity require licenses (this applies to foreign entities and businessmen as well). The list of such activities is stipulated in Art. 17 of the Federal Law On Licensing of Certain Kinds of Activity of 8 August 2001 with amendments of 26 March 2003 No.36-FZ. This list of activities to be licensed is supplemented by those requiring licensing under special laws, in particular, stock exchange, insurance, notary, banking, exchange, educational and some other activities.

The law also stipulates the procedure for obtaining and issuing licenses. State duty is charged for issuing a license. A license issued under the above law is valid for not less than 5-years time-period and applies to the activities for which it was issued. Licenses are not transferable.

According to Art. 61 of the RF Civil Code a legal entity carrying out some activities without permission (license) when it is required, may be subject to judge-ordered involuntary dissolution.

The standard of entrepreneurs’ liability for contractual obligations is stricter that the standard applicable to ordinary persons. A general rule of the Russian Law is that a person who has not performed an obligation or has performed it an improper manner may be liable only in case the violation was willful or negligent. This rule does not apply to entrepreneurs. Entrepreneurs bear liability for obligations that have arisen in connection with their entrepreneurial activity regardless of any negligence on their part “unless it is shown that performance was not possible as the result of force majeure” (Art. 401 of the RF Civil Code).

Special rules exist for conducting certain types of entrepreneurial activity. For example, banking activity is regulated by the RF Federal Law On Banks and Banking activity in the RF, activity of insurance companies is regulated by the RF Federal Law On Organization of Insurance Business in the RF, activity of professional stock exchange participants - by the RF Federal Law On Stock Exchange and the law On Securities Market.

Legal entities and individual entrepreneurs performing business in the sphere relating to consumer’s activity are also obliged to comply with the RF Federal Law On Protection of Consumer’s Rights of 7 February 1992 No. 2300-1 (with amendments of 30 December 2001) and by-law acts on consumer’s rights protection.