The Tax Code has been supplemented with chapter 3.6, which establishes taxation specifics of implementing an APECI

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Pepeliaev Group advises that on 28 June 2022, two federal laws[1] were adopted that amend the Tax Code and Federal Law “On protecting and encouraging capital investments in the Russian Federation” and that are aimed at improving the mechanism of APECIs.

The status of a taxpayer that is a participant in an APECI

A new category of taxpayers has been introduced – a taxpayer that is a participant in an Agreement on Protecting and Encouraging Capital Investments (APECI). This is an entity that has entered into an APECI on which information is included in the special register of such agreements. Once the information appears in the register the company acquires the relevant status. The loss of the status is connected with withdrawal from or termination of the agreement.

The tax implications of terminating the status of an APECI participant depend on the grounds for such termination of the status. Among other things, there are grounds for reinstating and paying to the state budget, with a recovery of the relevant default interest, the amounts of taxes not paid in connection with the stabilisation clause being applied (article 5( 4.3) of the Tax Code), as well as in connection with the application of tax deductions (new article 25.18 of the Tax Code).

Tax “savings” must be reinstated if an APECI has been terminated further to one of the following circumstances being identified:

  • the provision of inaccurate information when the APECI was concluded or performed;

  • a failure to make capital investments that are stipulated by the terms and conditions of the APECI within more than two years after the expiry of the term for their performance;

  • certain legal facts, which are provided for by the terms and conditions of the agreement, not taking place within more than two years upon expiry of the period stipulated by the agreement, including a construction permit not being obtained, title to real estate not being registered with state authorities, etc.;

  • violation by the company implementing the project or its officers of Russian legislation, which resulted in a suspension of activity of the company or a disqualification of its officers;

  • receivership proceedings having been instigated with respect to the company or a decision to liquidate the company having been taken;

  • three years having expired from the date of the entry into force of the APECI with the tax authority not having issued any resolution to conduct tax monitoring in relation to the company;

  • before the expiry of the period for adopting a stabilisation clause, the company having sent to the tax authority a statement of the refusal to conduct tax monitoring or the tax authority issuing a resolution for the early termination of tax monitoring;

  • APECIs being recognised void under civil legislation.

The fact that the wording cited above is so circulatory creates considerable risks for a participant in an APECI. For instance, it is unclear what is meant by a “suspension of activity”. Possibly, it means an administrative suspension of operations as a type of administrative punishment that is stipulated as a sanction with respect to an entire range of administrative offences (in the Code of Administrative Offences). Among other things, a company's activity may be suspended for a failure to comply in due time with a supervisory authority’s improvement notice. As a result of a failure to comply with the improvement notice the company may have to reinstate the tax to the budget. Obviously, much will depend on judicial authorities assessing the sufficiency of grounds for terminating an APECI.

The law does not clearly state from which moment the tax “savings” are to be reinstated. However, given that, whenever agreements are terminated on the above grounds (recognised invalid), the status of a member of APECI is recognised as lost from the date of the assignment of such status, one may assume that the taxpayer must return to the state budget all the “savings” for the entire time that it was listed in the APECI register. 

These amendments will come into force upon the expiry of one month after the official publication of the Law. 

At the same time, it is unclear whether the amendments cover the current participants in APECI, taking account of the ‘stabilisation clause’ being present (article 5(4.3) of the Tax Code). The relevant provisions of the Code allow for the range of ‘stabilised’ relationships to be interpreted broadly, as the legislature uses the phrase ‘among other’ when referring to provisions of the acts of legislation on taxes and levies.

Tax deductions for an APECI

The mechanism of an APECI did not previously stipulate any tax benefits for participants in the form of reduced tax rates or deductions. The amendments in question introduce such benefits as of 1 January 2023.

For instance, the participants in an APECI that are concluded after 1 June 2022 and have the Russian Federation as one of their parties are provided with the opportunity to apply tax deductions with respect to a number of taxes: corporate profit tax, corporate property tax; land tax. The procedure of granting deductions for specific taxes is established in special provisions of part II of the Tax Code.

Participants in an APECI may apply tax deductions in the amount of the expenses actually incurred which qualify for the measures of state support under the Federal Law on APECIs. The mechanism of the tax deduction suggests that a part of the investor’s expenses on infrastructure will be deducted from the taxes arising out of the implemented project.

As a result of the tax deduction being applied, the taxes following out of activities in the investment project that is the subject matter of an APECI may be cut down to zero based on the result of the tax period. The maximum amount of deductions is set out in the special notice that is sent to the Russian Federal Tax Service by the authorised federal executive body signing the APECI on behalf of the Russian Federation[2].

At the same time, for the purposes of applying the tax deduction the taxpayer needs to ensure that separate accounting books are kept.

Tax monitoring

For companies entering into an APECI the transfer to tax monitoring becomes a compulsory condition. Such an amendment has been introduced to the Federal Law on APECIs. Each new agreement must contain an obligation of the company implementing the project to switch to tax control in the form of tax monitoring within three years from the day on which the APECI was entered into.

At the same time, the corresponding amendments have been made to the Tax Code. The subject matter of the tax monitoring with respect to a participant in an APECI will be, among other things, an audit of actual expenses that qualify for state support measures under the law.

At the same time, the list of grounds for the unilateral termination of an APECI has been expanded with an indication of the non-performance by a company of the tax monitoring obligation.

Stabilisation clause

Previously, proposals for the stabilisation clause within the scope of an APECI did not mention relationships involving the payment of mineral extraction tax.

The amendments introduce stabilisation provisions in relation to changing or cancelling the procedure for determining and applying the extraction territory coefficient (ETC) that characterises the territory of extraction of the mineral resource when calculating the mineral extraction tax, but only with respect to the taxpayers that have entered into an APECI to which one of the parties is the Russian Federation and, at the same time, implementing a new investment project in the area of the extraction of non-ferrous metal ores (gold) with the volume of capital investments being no less than RUB 300 billion.

Other changes

  • The amendments rule out the possibility of a reimbursement of infrastructural expenses out of tax payments to companies that have entered into an APECI and are implementing projects in the area of extraction of non-ferrous metal ores (gold) with a volume of capital investments being no less than RUB 300 billion that are included in the register of participants in regional investment projects;
  • The constituent entities of the Russian Federation are vested with powers to examine an investment project and prepare an opinion to this effect. A negative opinion will be the ground for concluding that an APECI is to be denied;
  • The procedure and timeframes for applying stabilisation clauses are being adjusted. For federal projects capital investments are required in a volume of no less than RUB 750 million (previously the figure was RUB 250 million). For the stabilisation clause to apply throughout the maximum period of 20 years a volume of capital investments of no less than RUB 15 billion will now be required (previously the figure was RUB 10 billion);
  • A process has been settled for performing the obligations of the investor and the state in the event of a force majeure and considerable changes in circumstances; a tentative list of such circumstances has been drawn up;
  • The criteria for the novelty of an investment project have been set out in greater detail.

What to think about and what to do

We recommend that companies should:

  • Assess the economic feasibility of applying the suggested conditions of stabilising legal relationships, providing measures of support and tax deductions;
  • Examine the possibility of entering into an APECI (including with respect to projects that have begun);
  • Controlling the processes for mitigating the risks of an APECI being terminated and the amounts of taxes being reinstated to the state budget.

Help from your adviser

Pepeliaev Group’s lawyers are ready to: provide comprehensive legal support, including: assistance in preparing an application to enter into an APECI together with the related documents; assist with the entry into an APECI, including participation in the negotiation process with state authorities; handle projects where companies enter the tax monitoring process, as well as provide assistance in dealing with tax authorities and other regulatory bodies; and provide other legal services during your production operations.

Legal issues that arise on the part of investors in connection with the use (planned use) of a certain special investment regime are discussed at our Invest Club platform. Join us in the Т-channel!

[1] Federal Law No. 225-FZ “On amending parts one and two of the Tax Code”, Federal Law No. 226-FZ “On amending Federal Law ‘On protecting and encouraging capital investments in the Russian Federation’”.
[2] Until recently, pursuant to the Russian Government’s Decree No. 1577 dated 1 October 2020, such authorised federal executive body was the Ministry of Economic Development. However, the document has ceased to have effect since 2 April 2021, and the authorised body has not yet been officially determined.

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