Significant changes have been made to taxation of organisations that participate in regional investment projects (“RIPs”) in Russia. These changes were effected by Federal Law No. 144-FZ dated 23 May 2016 (the “Law”) (here in Russian).
The Law enables a company, when calculating the total amount of capital investment committed to an RIP (which in turn enabled it to qualify as an RIP participant), to take into account the portion of the capital investment made before its registration as an RIP participant. In addition, the Law now allows investors to implement RIPs in any region of Russia. Previously, RIPs could only be executed in the Russian Far East and Transbaikal as specified in the exhaustive list of the Tax Code of the Russian Federation.
Application of income tax incentives
The Law within the framework of an RIP implementation provides taxpayers with the right to apply, for a specified period of time, a zero income tax rate on the portion of the tax that is paid into the federal budget, as well as reduced rates (down to 0%) on the income tax that goes into the regional budget. The participants of RIPs listed in the RIP Participants Register (the “Register”), as well as those who are not listed in the Register are both eligible for the income tax incentive.
RIP participants who are not included in the Register apply:
- a rate ranging from 0 to 10% of the income tax amount payable into the regional budget for a period of 10 years from the date of their requests for the application of this incentive, provided they have met the requirements on the minimum amount of capital investment; and
- a rate of not less than 10% for the next five years.
For RIP participants listed in the Register and implementing projects in Russia outside Transbaikal and the Far East, the rate of the income tax payable into the regional budget can be reduced to 10% for a period, running from the date of receipt of the first profit from the implementation of the investment project until the difference between the taxes calculated at a 20% rate and at the reduced rate is equal to the amount of capital investment.
RIP participants included in the Register who are implementing projects in Transbaikal or the Far East can choose which of these two incentives to use.
Application of incentives relating to the mineral extraction tax
Under the Law, it is possible to apply a coefficient reducing the amount of the mineral extraction tax. The applicable coefficient which characterises the place of extraction of the relevant mineral (0, 0.2, 0.4, 0.6, 0.8) depends on the tax period in which the RIP is implemented.
This incentive is available from the time when the grounds for determining the tax base for the mineral extraction tax arise.
Application of an increased depreciation coefficient
The amendments have made it possible to apply an increased depreciation coefficient of not more than 2 in relation to the fixed assets produced in accordance with the terms of a special investment contract (please see our previous Alert with comments on special investment contracts). The Russian Government still needs to adopt the procedure for allocating assets to depreciable fixed assets produced within the framework of a special investment contract.
Documentary obligation of incentive beneficiaries
To confirm the right to claim incentives, an RIP participant has to ensure the safekeeping of all the accounting and tax data as well as other documents required for the calculation and payment of taxes during the entire period of the application of the reduced rates. For capital investments exceeding RUB 500m (approx. EUR 7.17m), the safekeeping period is six years.
Entry into force
These amendments came into force on 23 June 2016, except for the following provisions: (i) the application of a reduced rate for the mineral extraction tax is possible with effect from 1 July 2016; and (ii) the application of the income tax incentives will be possible from 1 January 2017.
It is important to note that the Law contains a kind of grandfather provision. Specifically, the Law provides guarantees against the application of legislative acts on taxes and fees worsening the position of taxpayers who are party to a special investment contract. Rules worsening the position of such taxpayers will not apply before the expiry date of the relevant special investment contract or before the expiry date of the tax incentives established when the special investment contract was entered into, whichever occurs first.
Trends in the development of investment tax incentives
The Law regulates the use of incentives only in respect of the income tax and mineral extraction tax. It should, therefore, be supplemented by the rules on granting incentives relating to property tax and social contributions. This is why we expect that in the near future relevant legislation will be discussed.
The analysis of the Law has shown a trend under which the provision of incentives is being switched from the federal budget to the regional budgets. This trend is likely to continue in the short-term. The Russian Government is (at the request of the President) developing a plan under which the 10 most inefficient special economic zones will be closed, and the remainder transferred to the regions. As a part of this initiative, the issue of establishing common criteria and approaches for the creation of special economic zones and priority development territories is also being discussed.
Recommendations for investors
The Law has established significant income tax incentives to be considered by investors when deciding to implement an investment project in Russia. However, due to the lack of judicial practice on the application of these incentives to RIP participants, we recommend exercising care when claiming the status of an RIP participant, choosing the optimal tax regime for the implementation of the project and claiming incentives, as well as when fulfilling the requirement to retain all the accounting and tax data.
The Law has now clarified the types of income tax incentives investors in RIPs can expect. As stated above, more incentives may be available in the future, as federal laws changing the incentives relating to the property tax and social contributions are expected to be adopted. As a result, legal developments in this field should be monitored.