In Leningrad Region, new tax benefits have been introduced for investors

FAO business development managers, heads of companies’ investment, financial, tax and legal departments.

Pepeliaev Group advises that the Leningrad Region legislation regarding tax benefits for investors is to undergo significant amendment.

The legislative Assembly of Leningrad Region has passed in its third reading the law On the rate of corporate profit tax for companies carrying out investment activity in Leningrad Region (the “Law”). The Law substantially expands the possibility for companies carrying out investment activity in Leningrad Region to obtain tax benefits.

Pepeliaev Group comments: We note that, at present, the procedure for investors to be granted tax benefits in Leningrad Region is, in essence, permissive – in particular, the right to pay profit tax at a rate of 13.5% to the extent that it is paid into the regional budget is obtained by investor companies that have entered into contracts regarding the provision of state support under the Region’s law No. 24-oz On state support for investment activity in Leningrad Region. The procedure for negotiating and signing such contracts is protracted and in practice often entails significant difficulties.
 
The law introduces the possibility of obtaining a right to apply a reduced profit tax rate under a declarative (notification) procedure:

• the rate of profit tax to the extent that it is paid into the regional budget of Leningrad Region, is set at 13.5% for companies that, in any three successive calendar years starting from 1 January 2012, make investments of RUB 1 billion (inclusive) and more.
• investments are defined as fixed asset items (including fixed assets which are used to carry out reconstruction and/or renovation in Leningrad Region), including those received as a contribution to a company’s issued capital (unless received free of charge or under a finance lease), which have not previously been operated in Leningrad Region and are intended to be used in manufacturing goods, and which are booked in the company’s accounts and put into operation in Leningrad Region.
• the company must pay profit tax to the regional budget of Leningrad Region (i.e. it need not be registered in Leningrad Region, and it is sufficient if the company has a standalone division there that is registered with the tax authorities).
• the company should carry out types of activity that fall under section D of the  All-Russian Classifier of Types of Economic Activity.
• the right to apply a reduced rate is granted for a term of five years starting from 1 January in the year following that in which the amount of investment reaches the required level.

The right to apply a reduced rate may be lost early if:

• fixed asset items taken into consideration when calculating investment are disposed of (retired) and, as a result, the total amount of the remaining investments is less than RUB 1 billion. In this event, the whole amount that was ‘saved’ by applying the tax benefit over the whole time should be paid in addition into the Leningrad Region budget;
• as a result of the benefit being applied, the taxpayer pays into the Leningrad Region budget less tax for a calendar year than before the benefit started to apply. In this event, the right to apply a reduced rate is lost for the future.

The Law does not stipulate the composition of the documents that must be submitted to the tax authority along with the tax return in which the reduced rate is asserted. However, based on article 88(6) of the Russian Tax Code, when a desk audit is carried out, the tax authority may require documents confirming a taxpayer’s right to a tax benefit. We recommend that taxpayers planning to apply the reduced rate under the Law should put together a preliminary calculation of the investment and compile other documents confirming compliance with the conditions stipulated by the Law.

Pepeliaev Group comments: The Law’s text is close to the regulation contained in St Petersburg’s Law No. 81-11 dated 14 July 1995 On tax benefits (article 11-8). This is because the economic section of the regional government is currently headed by individuals who moved from the St Petersburg Government. The closeness in the provisions allows approaches to be applied that have been worked through in administrative and, most notably, judicial practice over the time in which the provisions of the St Petersburg law have been applied.

A comparative analysis of the regulations shows that the St Petersburg law provides somewhat more possibilities than the Law in question. Most notably:

The Law should be signed by the Governor of Leningrad Region and officially published in the near future. Companies making investments starting from 1 January 2012 will be able to use the reduced profit tax rate from 1 January 2013.
In addition, benefits already granted to companies that have entered into contracts to provide state support remain in force.

There arises uncertainty as to whether it will be possible to enter into such contracts in future and to obtain the right to apply tax benefits as before. At present, no amendments have been passed to the existing regulations (regional laws No. 24-oz On state support for investment activity in Leningrad Region dated 22 July 1997 and No. 46-oz On rates of corporate profit tax for investors carrying out investment activity in Leningrad Region dated 16 June 2005). The previous regime therefore continues to apply. However, in explanatory documents to the Law, reference is made to the need to amend the laws. It cannot therefore be ruled out that such amendments will be passed in the near future.

What to think about, what to do

We recommend that all companies which are investing in fixed assets in Leningrad Region, or are planning to do so, analyse whether they may apply the benefits in the light of the amendments made by the Law.

Help from our lawyers

Pepeliaev Group’s lawyers are ready to help in assessing whether the benefits in question may be applied, as well as preparing the necessary supporting documents.

For further information, please contact:

in St Petersburg - Sergey Sosnovsky, Head of Tax Practice (St. Petersburg), at (812) 640-60-10 or by e-mail