1. Production Support in Russia

During state or municipal procurement (works or services), as well the procurement for public enterprises products made in Russia shall have precedence. Products made in Russia or the Eurasian Economic Union shall be admitted to national and municipal procurement process without any restrictions or limitations. This applies, in particular, to procurement of machinery[1], pharmaceuticals[2] and medical equipment[3], radio equipment[4], and software[5].

The Government of the Russian Federation has also provided that Russian products shall have precedence during procurements by companies with state participation[6]. This means that bid contemplating that Russian products will be supplied, shall be assessed at contract price reduced by 15 % (or 30 % for some goods), thus giving this bid precedence in choosing the best offer. However, the respective agreement shall be signed with full contract price proposed in the bid. This precedence mechanism conforms to WTO Agreements, in particular, the 1994 General Agreement on Tariffs and Trade, and the Treaty on the Eurasian Economic Union dated 29 May 2014.

Low-interest Loans

Entities that conduct operations in Russia are entitled to low-interest loans from various development institutions offering support to investors at the state level.

The Industrial Development Fund is one of institutions that disburse such loans. It grants special-purpose loans aimed at industrial projects with amounts from 5 million to 2 billion roubles at 1%, 3%, and 5% per annum for up to  5-7 years. These loans granted by the IDF offer lower borrowing costs than the market average, but they can be spent under the stated purpose only. The Fund currently offers a wide range of programs aimed at financing projects in areas like designing new high-tech products, import substitution, export, lease of manufacturing equipment, implementation of machine-tool manufacturing projects, digitalization of existing manufacturing facilities, manufacture of components, pharmaceuticals labelling, and workforce productivity improvement.

Besides, the Industrial Development Fund currently has a joint program with regional industrial development funds. This program offers loans to production creation projects and provides for joint funding where 70% of a loan is provided by the Industrial Development Fund and 30% by the regional fund. Regional industrial development funds may also extend loans of 20 to 100 million roubles to small and medium-sized businesses at their discretion.

Apart from the Industrial Development Fund, low-interest loans are also offered by other development institutions such as VEB.RF, the Single-industry-towns Development Fund, the SMB Corporation, the Russian Export Centre, and others.

Support as part of National Projects

The State also offers support to investors as part of several national projects. For example, the National Project “Small and Medium-sized Businesses and Support to Individual Entrepreneurial Initiatives” provides for promoting employment growth for small and medium-sized businesses, increasing the share of the SMB in the GDP, and supporting small and medium-sized businesses in single-industry towns. These ambitions aims are expected to be achieved through improving the business environment, expanding access of small and medium-sized businesses to financial resources, including low-interest finance, and business acceleration.

The Government of the Russian Federation also provided special terms for SMB to take part in procurement procedures of the companies with state participation. These special terms may, for example, oblige the companies in some cases to procure from small and medium-sized businesses only.[7]

The National Project “International Cooperation and Export”, whereunder the share of export of manufactured goods, agricultural produce, and services in the country’s GDP is projected to grow by 20% by 2024, also provides for investors’ support. The measures to achieve that include: single unified system to support export in key foreign countries and 85 constituent entities in the Russian Federation; “one-stop-shop” information system based on the digital platform by Russian Export Centre AO; national system for analytical support of export operations; and electronic document management system for transportation of goods through international transport corridors. In addition, if more than half of products are exported, the interest rate applicable to the loan under Industrial Development Fund programs will be reduced to 1% per annum.

The national project “Work Productivity and Employment Support” also provides for consulting services by experts from “The Federal Centre of Competences (FCC) in the Area of Workforce Productivity” (an Autonomous Non-profit organization) that will focus on eliminating process inefficiencies directly on site and training employees on how to boost workforce productivity. The National Project also provides for a mechanism to subsidize interest rates of the loans to SMBs involved in the national project to enable them to implement work-productivity-boost projects in priority sectors at a low interest rate.

The national project “Environmental Protection” provides a mechanism for industrial producers to subsidize the coupon rate on bonds issued to finance best available techniques (BATs) projects. Besides, the project provides for a revision of BAT guides and environmental engineering development.

Subsidizing

Companies can apply for subsidies to various industry-specific agencies of federal and regional executive authorities.

There are many opportunities to get subsidized, depending on industrial sector and scope of operations of specific company. Subsidies may, for instance, cover a part of interest on loans received from Russian banks to establish or develop manufacturing facilities, or cover a part of operating and sales expenses, maintain workplaces, etc.

Special Economic Zones

A special economic zone (“SEZ”) is an physical area within the Russian Federation, that is granted by the Government of the RF a special regime for business operations. It may also enjoy a free economic zone customs regime.

Each SEZ has its own special legal status, which is a combination of certain tax benefits and customs preferences for investors. It also provides transport, engineering and business infrastructure. Investors may achieve savings on costs up to 30-40 % compared to the average level if they implement their project in a SEZ.

Industrial Parks

An industrial park is an area optimized specifically for new manufacturing facilities. It has fully operational utilities, infrastructure, offers necessary administrative and legal support and is managed by a dedicated company. The “industrial park” and “manufacturing park” refer to the same.

Many industrial parks have been built recently in Russia featuring operational industrial infrastructure and utilities suitable to support industrial production. This infrastructure is supported by the state in the form of subsidies to compensate construction costs and maintenance services provided by the Shared-use Centres. This helps companies, who choose to deploy their manufacturing facilities in these parks to save time, reduce costs and achieve higher quality. As a result, the recent years have seen a steady trend where investors have been acquiring either land plots for industrial construction or completed industrial facilities in industrial parks.

Outstripping Development Territories

An outstripping socio-economic development territory (“ODT”) means a territory with special legal regime for entrepreneurial and other aimed to set up a favourable environment to attract investments, accelerate socio-economic growth, and establish a comfortable environment for the population.

By now the Government of the Russian Federation has set up about 100 outstripping development territories.

The State grants the ODTs tax benefits, creates necessary infrastructure and issues necessary authorizations in expedite fashion, and simplifies hiring foreign employees. An employer being an ODT resident will not need a permit to hire foreign employees, and a foreign employee will be granted his work permit without regards to quotas.

[1] Decree of the Government of the RF dated 14 July 2014 No. 656 “On Imposing Ban on Admitting Certain Types of Machinery Originating from Foreign States to Procurement for National and Municipal Needs”.

[2] Decree of  the Government of the RF dated 30 November 2015 No. 1289 “On Restrictions and Conditions for Admitting Pharmaceuticals Originating from Foreign States and Included into the List of Vital and Essential Drugs for Purposes of Procurement for National and Municipal Needs”.

[3] Decree of the Government of the RF dated 5 February 2015 No. 102  “On Restrictions and Conditions for Admitting Certain Types of Medical Products Originating from Foreign States for Purposes of Procurement for National and Municipal Needs” and Decree of the Government of the RF dated 4 December 2017 No. 1469 “On Restrictions and Conditions for Admitting Bare-metal Drug-eluting Coronary Stents (Including Stents with Non-absorbable Polymer Coating and with Absorbable Polymer Coating), Standard Balloon Catheters for Coronary Angioplasty and Suction Catheters for Embolectomy (Thrombectomy) Originating from Foreign States for Purposes of Procurement for National and Municipal Needs”.

[4] Decree of the Government of the RF dated 10 July 2019 No. 878 “On Measures to Promote Manufacturing of Radio Electronic Products in Procuring Goods, Works, and Services for National and Municipal Needs in the Russian Federation, on Amendments to the Decree of the Government of the Russian Federation Dated 16 September 2016 No. 925, and on Repealing Certain Regulatory acts of the Government of the Russian Federation”.

[5] Decree of  the Government of the RF dated 16 November 2015 No. 1236 “On Imposing a Ban on Admitting Software Originating from Foreign States to Procurement for National and Municipal Needs”.

[6] Decree of  the Government of the RF dated 16 September 2016 No. 925 “On the Priority of Goods of Russian Origin and Works and Services by Russian Persons over Goods of Foreign Origin and Works and Services by Foreign Persons”.

[7] Decree of the Government of the RF dated 11 December 2014 No. 1352 “On Special Aspects of Small and Medium-sized Businesses’ Bidding for Goods, Works, and Services Procurement by Certain Types of Entities”.

Regional (i.e. the level of a constituent entity of the Russian Federation) investor support takes forms of various benefits and guarantees, financing, and other forms of support to investment projects.

1. Regional Benefits

Regional support is provided using budgetary funds of constituent entities of the Russian Federation, local budgets, and extrabudgetary funds.

For instance, the following forms of investor support are in effect in Moscow [8]:

• granting benefits or setting reduced rates in respect of the corporate property tax, land tax, corporate profit tax payable to the budget of the City of Moscow, and(or) rent payments for land plots that are owned by the City of Moscow or where the state title has not undergone demarcation [9];
• granting subsidies, including subsidies to finance research, development and engineering works performed in implementing high-priority investment projects of the City of Moscow;
• deferred payments of rent for a land plot or a deferred payment for changing the type of permitted use of a land plot;
• granting extra guarantees and compensations to investors; and
• the national capital investments to create infrastructure of technological or industrial (manufacturing) parks as part of implementing high-priority investment projects of the City of Moscow.

In Saint Petersburg, the forms of investor support are as follows [10]:

• loans;
• participation in establishing business partnerships and companies;
• procurement orders of the government of Saint Petersburg;
• compensations for investors implementing investment programs that are of high-priority for Saint Petersburg.

Besides, some tax benefits are provided regarding amounts payable to the budget of Saint Petersburg. Investors who rent land plots from the city of Saint Petersburg, and plan to build or renovate real estate on the rented land plots are granted discounted rent rates for these land plots throughout the duration the whole period of renovation or construction.

[8] Law of the City of Moscow dated 7 October 2015 No. 54 “On the Investment Policy of the City of Moscow and State Support to Entities Involved in Investment Activities”.

[9] This refers to cases where the state property has not yet been demarcated on federal, regional, and municipal level.

[10] Law of Saint Petersburg dated 30 July 1998 No. 185-36 “On State Support to Investment Activities in the Territory of Saint Petersburg”.

The municipal support is usually aimed to support small and medium-sized businesses. The Strategy for Developing Small and Medium-sized Businesses in the Russian Federation for the Period until 2030 [11] provides, first and foremost, for support to SMBs during municipal procurement, that is, to expand access of small businesses to procurement of goods, works, and services for municipal needs and needs of companies with state participation, including setting of a quota for the said procurement.

Besides, legislation provides for financial support to small and medium-sized businesses from local authorities. The financial support may take form of subsidies, budget investments, and municipal guarantees with funds from local budgets (such as subsidies to upgrade manufacturing facilities of small and medium-sized businesses [12]).

A municipal guarantee is a type of surety bond, i.e. the municipality assumes lability for obligations of a small or medium-sized business before creditors. The total amount of and conditions for issuing such guarantees are set out in the municipal guarantees program for the respective financial year, adopted with the budget.

Besides, local authorities may provide municipal properties, including land plots, buildings, equipment, mechanisms, vehicles, and tools to businesses for use for a fee, for free, or at a discount.

Local authorities may also offer to businesses consulting support.

[11] Directive of the Government of the Russian Federation dated 2 June 2016 No. 1083-r.

[12] Federal Law dated 24 July 2007 No. 209-FZ “On Developing Small and Medium-sized Businesses in the Russian Federation”.

Russia has established multiple special economic zones of various types offering preferential environment for business to promote economy and develop these territories. Regulations may vary, but they all provide some tax benefits in that form or another.

Special Economic Zones

As of October 2019, Russia has 25 special economic zones (SEZs). SEZ residents may be Russian companies (sometimes even individual entrepreneurs) without branches or representative offices outside these zones. In return to becoming a local business they are offered tax benefits.

SEZ residents pay a reduced profit tax for profits earned from operations in the zones: 2 % as compared with regular 3 % payable to the federal budget and no more than 13.5 % to the regional budget as compared to regular 17 % (the actual rate depends on the region). For businesses in the tourism and recreational SEZ cluster, the “federal” tax rate is set to zero until 2023.

Besides, SEZ residents are exempt from the corporate property tax for 10 years. This exemption applies to assets located and used in the zones. They are also exempt from the land tax for 5 years; the exemption applies to land plots located in the zones. A lot of SEZs offer reduced insurance tariffs and (or) accelerated depreciation rate of balance-sheet fixed assets. SEZs offer a free customs zone regime: goods imported to be deployed or used in the zones are exempt from import customs duties and taxes.

Special tax regime is also used in the SEZs in the Kaliningrad Region, and in Magadan, and also in the free port of Vladivostok.

Outstripping Socio-Economic Development Territories

Territories of outstripping socio-economic development (OSEDTs) aim to promote economic development in certain regions. By now Russia has set up more than 100 OSEDTs [16]; the residents are Russian companies and individual entrepreneurs who have no branches or representative offices outside OSEDTs. The OSEDT residents also undertake to make a certain amount of investments in accordance with agreements between them and companies that manage the territories.

In exchange, the residents get reduced profit tax rates on operations conducted in the OSEDTs in accordance with the agreements (0 % for the tax payable to the federal budget and no more than 5 % for the tax payable to the budget of the region). This benefit is valid for five years after first profit from such operations is earned. If no profit is earned, the preferential rates apply automatically beginning from a certain year after the operations are commenced in the OSEDT (depending on the agreed amount of investments).

Besides, the residents are entitled to reduced insurance tariffs during the first 10 years of operations, some benefits in respect of the mineral extraction tax. Another available benefit is the free customs zone regime applicable to them. Regional laws may provide for additional property-tax preferences for OSEDT residents.

It is important to note that the preferential tax regime may not be changed to the worse for the whole term of OSEDT residency (the so-called ‘grandfather clause’).

“Skolkovo” Innovations Centre

The Skolkovo centre was created to promote research and help market the results. The centre is focused on supporting Russian high-tech startups. Only legal entities may participate in such projects.

Entities, involved in Skolkovo projects, may take advantage of the tax break: they are exempt from the profit tax and VAT and are entitled to reduced insurance contributions for the duration of 10 years from the date they become involved into these projects, provided that their revenues and(or) profits are below certain thresholds. For instance, the total revenue threshold is 1 billion roubles a year. Besides, businesses in Skolkovo are exempt from the corporate property tax. The only tax that businesses are not exempted from is the import VAT on imported goods.

Starting from 2019, new innovative sci-tech centres with preferential tax treatment for business started to appear in Russia.

[16] As of 25 October 2019.

Territories with special tax regime is not the only way for businesses to obtain tax benefits for investment projects in Russia. Investors may be involved in certain investment projects not due to being located on these territories, but in accordance with contracts with state authorities. The said contracts may also entitle them for tax preferences.

Special Investment Contracts

The Russian Federation, its constituent entities and municipalities have the right to conclude with investors special investment contracts (SPICs); these contracts provide businesses with considerable benefits in return for investments into implementing technologies for mass production.

An investor concluding a SPIC can be certain that during its effective period the tax burden will not increase; this ‘grandfather clause’ to that effect is expressly included in the Tax Code of the Russian Federation. In implementing a SPIC, the investor is entitled to accelerated depreciation of certain types of fixed assets manufactured in accordance with terms and conditions of the contract. Buyers of these fixed assets are entitled to their accelerated depreciation as well; this makes products made under the SPIC more competitive.

Besides, parties to such contracts apply reduced profit tax rates in regard to profits earned from operations under the SPIC, in particular, from selling goods made under the contract: 0 % instead of 3 % regarding the tax payable to the federal budget and a reduced rate for the tax payable to the regional budget; the constituent entities may reduce the latter rate to zero. The above rates apply starting the year in which the first profit from selling goods made under a SPIC is earned. They remain in force until contract has expired or until the total amount of expenses and income not received by budgets due to the preferences under the SPIC exceeds 50 % of the amount of investments.

Regional Investment Projects

Russian companies may participate in regional investment projects (RIPs) in constituent entities of the Russian Federation, not involving conclusion of a SPIC, provided that such project is aimed at manufacturing goods in the respective region only. A company may participate in one RIP at a time. Tax benefits are granted in return for a certain amount of capital investments.

The key advantage of RIPs is reduced profit tax rate on profit from investment projects. The tax rate payable to the federal budget is set to 0 % instead of 3 %, either for the period of 10 years starting from the year when first profit from selling goods manufactured under the RIP is earned or for the period when the reduced rate for the “regional” portion of the tax is applied (depending on the constituent entity). The latter, in its turn, may be set at 0 % to 10 % for five years, beginning from the year when first profit is earned, or at 10 % and more until the amount of the tax not paid due to tax benefits equals the amount of the capital investments.

The companies involved into implementation of RIPs are also provided with certain mineral extraction tax preferences.

Property Tax Benefits

Regions and municipalities may, at their own discretion, introduce property tax benefits for investors. This applies to the following taxes: the corporate property tax, motor vehicle tax, and land tax. These benefits serve to engage more businesses in developing the economy of the respective territory.

More specifically, the base rate of the corporate property tax may not exceed 2.2 %. However, in overwhelming majority of regions the tax rate for investors is reduced below that level or even equals zero. In most cases, the preference is given in return for implementing an investment project in this region or conducting operations in a certain sector of the economy. Usually the investor also has to make investments within statutory limits.

Russian tax legislation provides a list of benefits available to investors, caring out specific activities. These benefits are not linked to special territories (such as SEZs, OSEDTs, etc.) or investment projects.

Investment Tax Deduction

Since 1 January 2018, companies can reduce the amount of their profit tax by the amount of some expenses they incurred. This benefit is similar to the internationally known tax credit mechanism.

The right to use the investment tax deduction is granted by the legislation of constituent entities of the Russian Federation. The amount of the profit tax may be reduced, first and foremost, by incurred expenses on establishing, purchasing, and (or) upgrading manufacturing facilities and fixed assets. Besides, the payable tax may be decreased by the amount of donations to national and municipal institutions of culture and expenses on creating infrastructure facilities under certain agreements.

The above expenses may be used to reduce the amount of profit tax to zero or by a certain percentage (for example, regarding the “regional” portion of the tax the percentage shall not exceed 80 % - 90% of expenses) and, at the same time, this amount should be within the limits calculated using the formula provided in legislation. Any excess deducted amounts may be carried forward to subsequent periods. These expenses are not subject to amortisation.

The deduction may not be used by companies being residents of the territories with a special tax regime or being party to investment projects.

Research and Development Expenses

If a company conducts research and development activities on its own initiative (not as a contractor under an agreement) in areas included in special list by the Government of the Russian Federation, the expenses incurred to finance this research may be deducted from income calculated for purposes of the profit tax, at the rate 150 % of their original amount. These areas include, in particular, nanotechnologies, biotechnologies, and genome technologies; IT and cognitive technologies; technologies for search, exploration and extraction of mineral resources; space technologies; and some other areas.

Reduced Insurance Contributions for IT Companies

Russian IT companies are entitled to reduced insurance contributions provided that they receive at least 90 % of their income from IT operations and that their average staff count is at least seven persons.

Reduced Import Duties and Taxes

If fixed assets intended for manufacturing are imported to Russia as the foreign investor’s contribution to the registered capital of a Russian company, they are exempt from import customs duties and the VAT.

The import VAT is not charged on manufacturing equipment, as well as components and spare parts to this equipment provided that no equivalents of such equipment are manufactured in Russia. The list of the equipment is maintained by the Government of the Russian Federation. Currently such equipment includes, for example, pumps for civil aircrafts, lines for the assembling and welding of vessel panels and bridge structures, and wind-energy electricity generators.