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Once a Limited Liability Company (LLC) is registered and a corporate bank account is opened, business operations can commence. However, it is crucial not only to establish operational and organizational frameworks but also to determine the most effective and legally compliant methods for generating and distributing income in accordance with Russian law. Proper income distribution is essential for ensuring the company’s financial stability, adherence to legal requirements, and the minimization of tax liabilities.
Below, we will explore the primary methods for generating and receiving income from a company's activities in Russia. These strategies will enable businesses to operate within legal boundaries while efficiently managing financial resources.
Authorized capital of a Limited Liability Company: what it is and its importance.
Authorized capital represents the minimum amount that founders must contribute to safeguard the interests of partners and creditors. During the registration of an LLC, the size of the authorized capital and its distribution among shareholders are determined, which in turn influences how profits are allocated. In Russia, the minimum authorized capital for an LLC is set at 10 000 RUB. This capital is formed from contributions by participants, which can include cash, property, rights, and intellectual property. Founders have the option to establish a higher amount of authorized capital, depending on the needs of their business.
Importance of authorised capital:
- Financial Stability: authorized capital serves as the necessary resources to initiate the company's operations. These funds cover initial expenses, facilitate project implementation, and enable the acquisition of fixed assets, ensuring the continuity of business processes.
- Attracting investments: potential investors assess a company's financial stability, with the size of the authorized capital being a key indicator. A higher capital amount generally increases investor confidence.
- Guarantee for creditors and partners: authorized capital demonstrates that the company has the minimum financial resources that can be directed towards fulfilling debt obligations. This is especially important for new companies that have not yet established a market reputation.
Even if the minimum amount of authorized capital was set during the company's registration, it can be increased by holding a general meeting, amending the charter, and registering these changes with the tax authorities.
Methods of increasing authorized capital:
- Additional contributions from company participants;
- Contributions from third parties — new participants;
- Directing part of the company's net profit to increase authorized capital.
Distribution of company profits through dividends.
Dividends represent a portion of the company’s net profit, distributed among participants in proportion to their shares in the LLC’s authorized capital.
Conditions for dividend distribution:
- A resolution by the general meeting of participants approving the payment of dividends;
- Availability of net profit recorded in the company's financial (accounting) statements;
- Adherence to charter provisions and legal restrictions. For instance, dividends cannot be distributed if it would jeopardize the company’s financial stability or if all taxes and fees have not been fully paid at the time of distribution.
Dividends payment procedure:
- Preparation and approval of financial (accounting) statements;
- Decision by the general meeting of participants to pay dividends;
- Calculation of dividends for each participant;
- Payment of dividends.
It is crucial to note that dividends can only be distributed after all mandatory taxes and fees have been paid, specifically:
- For non-residents of Russia, the dividend tax is 15%. If a double taxation avoidance agreement exists between the resident’s country and Russia, the tax rate may be reduced. To apply the reduced rate, the company must receive a tax residency certificate from the participant, certified by the competent authorities and translated into Russian.
- For residents of Russia — individuals, the dividend tax is 13% or more depending on the payment amount;
- For residents of Russia — legal entities, the dividend tax is 13%. However, if a legal entity has owned at least 50% of the company’s authorized capital for a minimum of one year, such dividends are exempt from taxation.
FYI: in 2024, Russia implemented a progressive personal income tax (PIT) scale. The tax rate now depends on the income amount: 13% for incomes up to 24 million RUB; 15% for incomes from 24 to 5 million RUB; 18% for incomes from 5 to 20 million RUB; 20% for incomes from 20 to 50 million RUB; 22% for incomes above 50 million RUB.
FYI: non-compliance with tax legislation when paying dividends or salaries may result in tax reassessments, fines, and penalties. Companies must diligently monitor legislative changes to mitigate financial risks.
Distribution of company profits through salaries.
Company profits can also be distributed among participants through salary payments, offering a highly flexible and manageable approach. This method allows for equitable remuneration while optimizing tax obligations. It is particularly beneficial for companies that operate with a significant number of subcontractors, where net profits may be limited due to substantial expenses. In such scenarios, salary payments provide an effective means of income distribution.
When issuing salaries, it is essential to account for mandatory tax deductions and social security contributions:
PIT:
- Base rate for Russian residents: 13%. If annual income exceeds 5 million RUB, a higher rate of 15% applies;
- Rate for non-residents of Russia: 30%.
Social security contributions – generally around 30%:
- Pension insurance: 22%;
- Compulsory medical insurance: 5.1%;
- Social insurance: 2.9%;
- Some employers pay an additional contribution for accidents and occupational diseases, which is about 1%.
In addition to fixed salaries, bonuses and rewards can also be distributed from the company's net profits. However, to qualify for these payments, employees must be officially employed by the company. Bonuses may be stipulated in the employment contract or authorized through a separate order. It is crucial that the procedures and conditions for bonus payments are clearly outlined in the company's internal policies, such as the Bonus Regulations. The taxation of bonuses is identical to that of salaries.
Distribution of company profits through a registered brand.
A registered brand is a unique name, symbol, design, or other distinctive feature that identifies a company and its products or services, setting them apart from competitors. Ownership of a registered brand grants the company exclusive rights to its use and protection against unauthorized exploitation by third parties.
If a company participant owns a brand registered abroad and plans to use it to promote services in the Russian market, this creates additional opportunities for profit generation. For instance, a company can leverage the registered brand to produce and sell licensed products within the Russian market, thereby increasing revenues through the brand’s widespread recognition.
How a registered brand contributes to profit distribution:
- License agreements and royalties: the brand owner may enter into a license agreement with a Russian company, granting it the right to use the brand for a fee — royalty. This allows the brand owner to receive a stable income from the use of their intellectual property.
- Franchising: the brand can also be used to expand the business through franchising. In this case, the owner grants the right to use not only specific intellectual property but also the entire business model of the company in exchange for regular payments — royalties.
- Creating added value: using a registered brand increases the added value of the company's products and services. The business reputation of the brand can contribute to increased trust and customer loyalty, which in turn increases the company's profits.
FYI: for non-residents of Russia receiving royalties from Russian companies, the tax rate is 20% unless otherwise provided by international double taxation avoidance agreements. If such an agreement exists, the tax rate may be reduced.
