The joint activity agreement was one of the most flexible, and at the same time most problematic, legal instruments of Russia's economic transition period in the early 1990s.
Its legal basis
The joint activity agreement was governed by Chapter 55 of the 1964 RSFSR Civil Code, which remained in force until the new Civil Code of the Russian Federation was adopted. Under Article 434 of the RSFSR Civil Code, in a joint activity agreement the parties agreed to pool their contributions and act together to earn profit or achieve some other goal not prohibited by law.
The key feature of such an agreement was that it did not create a legal entity. The participants remained independent legal subjects, but joined forces to pursue shared goals. This set it fundamentally apart from the founding agreements of joint-stock companies or partnerships.
Structure and content
A typical joint activity agreement included the following elements:
The subject of the agreement — a clear statement of the joint activity's goals. In the context of 1990s investment operations, this might be "the development of Russian science," "support for advanced technology," "assistance to scientific and technical progress," and similar high-minded phrasing.
The parties' contributions — each participant had to make some contribution: cash, property, expertise, connections, or other resources. The size and nature of each contribution was strictly recorded, since it determined how profits and liability would be shared.
Management of the joint activity — it was specified who made decisions and how. Often a sole manager was appointed, or a collective governing body was created.
Distribution of results — profits and losses were divided in proportion to contributions, unless the agreement provided otherwise.
Practical use in the 1990s
Amid the economic chaos of the early 1990s, joint activity agreements became widespread, for several reasons:
Simplicity of setup. Unlike forming a legal entity, such an agreement required no state registration, no charter capital, and no complex procedures. Signing the document and affixing stamps was enough.
Tax advantages. Joint activity was taxed under special rules. Participants could optimize their tax position by shifting income and expenses between themselves.
Confidentiality. Since the agreement was not subject to mandatory registration, information about the joint activity did not become public. This made it possible to conceal the real scale and direction of the business.
Abuses and schemes
The flexibility of the joint activity agreement was quickly seized on by those looking for ways around the law. Typical schemes included:
"Front" agreements. Formal partnerships were created purely for show, to draw attention away from the real business. One participant would serve as a "lightning rod" for any awkward questions from regulators.
Blurring liability. When claims arose, each participant could point to another as having made the decision, claiming they themselves had only followed the agreement's terms.
Laundering questionable income. Funds of unclear origin were "cleaned" through joint activity agreements, disguised as investment in science, culture, or social projects.
Tax planning. Artificially splitting a business among several participants made it possible to minimize tax obligations.
Regulators and their response
Tax authorities and law enforcement in the 1990s did not always keep pace with the sophistication of these new schemes. Joint activity agreements often became the subject of audits, but proving abuse was difficult:
First, the paperwork was formally in order — agreements were signed, stamps affixed, reports filed.
Second, the activity's real purpose was concealed behind respectable-sounding language about developing science and technology.
Third, liability was spread across participants, each of whom could point to a partner's actions.
Telltale signs of sham agreements
Over time, experienced auditors learned to spot the signs of bad-faith use of joint activity agreements:
Disproportionate contributions. One participant contributed the bulk of the assets, while another contributed only token sums or vaguely defined "services."
No real joint work. The participants did not actually interact with each other, and decisions were made unilaterally.
Frequent turnover of participants. One of the parties to the agreement was replaced repeatedly, with no apparent reason.
Unrealistic goals. The stated objectives did not match the participants' actual capabilities.
The evolution of the law
By the mid-1990s, lawmakers began tightening the requirements for joint activity agreements. The new Civil Code of the Russian Federation, adopted in 1994–1996, introduced significant changes to the regulation of "simple partnership" (as joint activity came to be called).
Tax law also evolved, closing the most obvious loopholes. In the period from 1992 to 1995, however, joint activity agreements remained one of the most popular tools for a "creative" approach to running a business.