Global Tax Alert | 24 October 2013

Russia enacts Federal Law providing tax incentives for far-east region

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On 30 September 2013, Russia’s President signed Federal Law No. 267-FZ amending the Tax Code to provide incentives for implementing regional investment projects within the Far Eastern Federal District and certain other regions (the Law).

The Law has undergone significant amendments since its first reading in the State Duma. This Alert summarizes the current provisions.

Scope and objectives

In order to increase investment in the economy of the far-east region, the law envisages special profits tax and Mineral extraction tax (MET) rates and other tax benefits for taxpayers carrying out investment projects in the following regions:

  • Republic of Buryatia,
  • Republic of Sakha (Yakutia)
  • Republic of Tyva
  • Transbaikal Territory
  • Kamchatka Territory
  • Primorye Territory
  • Khabarovsk Territory
  • Amur Province
  • Irkutsk Province
  • Magadan Region
  • Sakhalin Province
  • Jewish Autonomous Province
  • Chukchi Autonomous District

Profits tax rates

The rate of profits tax payable to the federal budget is 0% for ten years. The maximum rate of profits tax payable to the regional budget is 10% for the first five years and for the following five years, the minimum rate of profits tax payable to the regional budget is 10%. The period during which the 0% rate or a reduced rate can be applied starts from the year in which the first income from sales of goods produced under the regional investment project was recognized in the taxpayer’s tax accounting data.

Mineral Extraction Tax rates

The Law specifies that investment projects cannot involve the extraction and/or refining of crude oil, natural gas or gas condensate. Otherwise, the reduced MET rates for participants of regional investment exploration project are applicable to a wide range of minerals. The tax rate per the relevant subsection of clause 2 of Article 342 of the Tax Code is to be multiplied by a coefficient reflecting the territory in which a commercial mineral is extracted (Cte), beginning with the tax period in which the taxpayer was registered in the list of participants in regional investment projects. Cte is to equal to 0% in periods before a special profits tax rate applies under the amendments (i.e., in periods before the year in which the first income from sales of goods produced under the regional investment project was recognized in the taxpayer’s tax accounting data).

In the ten years from the start of the application of a reduced profits tax rate, Cte will be as follows:

0

for the first two years

0.2

for the third and fourth years

0.4

for the fifth and sixth years

0.6

for the seventh and eighth years

0.8

for the ninth and tenth years

1

in subsequent tax periods

General criteria

The list of criteria has not changed much from the June draft. The following criteria have been added to those which an investment project participant must satisfy:

  • It should keep separate records of income received from and expenses incurred in the implementation of a regional investment project from records of income and expenses relating to other economic activities;
  • The income generated from the sale of goods produced under investment agreement is not less than 90% of all income taken into account in determining the profits tax base;
  • It must own (or hold under lease at least until 1 January 2024) the land plot(s) on which the investment project is intended to be carried out. Also, these land plots must not have buildings or installations owned by an individual or by an organization which is not a participant in the investment project (with the exception of approach roads, supply lines, pipelines, power cables, drainage and other infrastructure facilities); and
  • It should not be a resident of a special economic zone.

Minimum investment criteria

The law states the following minimum levels of capital investment are required in a project to apply the incentives:

  • Not less than 50 million roubles (approximately US$ 1.5 million) in the first three years after a taxpayer is listed in the register of investment project participants (decreased from 150 million roubles in the draft); or
  • Not less than 500 million roubles (approximately US$ 15.4 million) in the first five years.

The Law states that the volume of capital investment may include the cost of performing design and survey work, new construction retooling and upgrading fixed assets, reconstruction of buildings; and acquiring machinery, equipment, tools, and inventory (with the exception of outlays on the acquisition of motor cars, motorcycles, sports and tourist vessels, and pleasure craft, and expenditures on building and rebuilding residential premises). However, costs incurred prior to registration as a participant in a regional investment project are not taken into account.

Industry restrictions

The list of activities which cannot be involved the investment project has not changed:

  • Extraction and/or refining of crude oil, the extraction of natural gas and/or gas condensate, and the transportation of crude oil, petroleum products, natural gas and/or gas condensate (the explanatory note specifically includes the rendering of services in this sector in excluded activities);
  • Production of excisable goods (except for cars and motorcycles);
  • Activities to which a 0% profits tax rate applies.

Other notable provisions

The Law introduces a special category of taxpayer to the Tax Code, “participants in regional investment projects,” and a register of such participants. The Law also provides the rules for the registration of participants in the register and other related procedures.

The Law establishes special provisions concerning the carrying out of an on-site tax audit of a participant in a regional investment project.

The Law will come into force from 1 January 2014 and its provisions regarding profits tax incentives will apply until 1 January 2029.

For additional information with respect to this Alert, please contact the following:

Ernst & Young (CIS) B.V., Energy Chemical & Utilities, Moscow
  • Richard Lewis
    +7 495 705 9704
    richard.lewis@ru.ey.com
  • Victor Borodin
    +7 495 755 9760
    victor.borodin@ru.ey.com
  • Alexander Smirnov
    +7 495 755 9848
    alexander.smirnov@ru.ey.com

Ernst & Young (CIS) B.V., Industrial Products, Moscow
  • Andrei Ignatov
    +7 495 755 9764
    andrei.ignatov@ru.ey.com

Ernst & Young LLP, Russian Tax Desk, New York
  • Julia Samoletova
    +1 212 773 8088
    julia.samoletova@ey.com

EYG no. CM3902