American Chamber of Commerce Annual HR Committee Conference HR’s Role in Risk Management: What Keeps You Awake at Night? Friday, October 13, 2006, Moscow Country Club Evgeny Reyzman, Partner Baker & McKenzie-CIS, Limited Moscow, Russia Expansion into the Regions of Russia: Labor Law and Practical Issues

©2006 Baker & McKenzie 2 Employers expanding into the regions: Russian companies Foreign companies with representative or branch offices Foreign companies with no corporate presence in Russia

Expansion into the Regions of Russia: Labor Law and Practical Issues ©2006 Baker & McKenzie 3 Options to employ people in Russia Under labor contract Under civil-law services agreement with individual contractor Under a civil-law services agreement with company-provider (intermediary)

Expansion into the Regions of Russia: Labor Law and Practical Issues ©2006 Baker & McKenzie 4 Employing individuals in regions under Labor Contract Creating work place: lease of premises/ work from home/ “roving commission” Separate structural division: registration with local tax authorities Special tax registration with Social Funds

Expansion into the Regions of Russia: Labor Law and Practical Issues ©2006 Baker & McKenzie 5 Employing individuals in regions under Labor Contract (continued) Documenting labor relationships Local labor-related rules and additional guarantees/ benefits (e.g. “Northern Benefits”)

Expansion into the Regions of Russia: Labor Law and Practical Issues ©2006 Baker & McKenzie 6 Accounting and tax reporting: additional burden –Individual Income Tax (at place of salary payment) –Unified Social Tax (UST) (at place of accruing / payment of salary) –Separate tax reporting of structural division Transport Vehicles Tax (at place of vehicle registration) Company Asset Tax (at place of location) Corporate Income Tax (at head office and local office) VAT (at head office only) Employing individuals in regions under Labor Contract (continued)

Expansion into the Regions of Russia: Labor Law and Practical Issues ©2006 Baker & McKenzie 7 Civil Law Services Agreement with Individual Contractor Registered individual entrepreneur: Registration with tax authorities Individual Contractor with no status of entrepreneur: potential risks

Expansion into the Regions of Russia: Labor Law and Practical Issues ©2006 Baker & McKenzie 8 Contracting Registered Individual Entrepreneur: advantages and disadvantages for employing company AdvantagesDisadvantages No registration with local tax authorities and Social Funds No tax agency obligations No UST and social insurance obligations Free termination of contract under Russian Civil Code with only compensation of actual losses of contractor Materially limited opportunities to manage/ control contractor VAT applies, unless contractor accepts Simplified Taxation System

Expansion into the Regions of Russia: Labor Law and Practical Issues ©2006 Baker & McKenzie 9 Contracting Registered Individual Entrepreneur: advantages and disadvantages for Individuals AdvantagesDisadvantages Contractor is free to choose more effective taxation system: regular or simplified with Unified Tax 6% on gross income or 15% on net profit Contractor is free to arrange work/ work time No Labor Code guarantees, materially lower social protection Additional registration and tax reporting obligations, possible audits by tax authorities VAT applies with regular tax system Questionable pension insurance: registered entrepreneurs pay minimal contributions to Pension Fund that are unable to reliably finance funded part of labor pension

Expansion into the Regions of Russia: Labor Law and Practical Issues ©2006 Baker & McKenzie 10 Employing individuals in Russia by Company with no local corporate presence Labor Contract Russian Labor Code applies –Documenting of employment –Registration with local authorities –Tax problems (permanent establishment and others) Registered Individual Entrepreneur Most reliable option Employing via intermediaries Possible labor and tax law risks

American Chamber of Commerce Annual HR Committee Conference HR’s Role in Risk Management: What Keeps You Awake at Night? Friday, October 13, 2006, Moscow Country Club Evgeny Reyzman, Partner Baker & McKenzie-CIS, Limited Moscow, Russia Expansion into Regions: Labor Law and Practical Issues