The intended amendments to the special administrative region (SAR) regimes. clarifications with regard to the types of investment by an international holding company (IHC) for the purpose of applying tax benefits

A draft law [1] has been put before the State Duma to clarify the forms and types of investment for international holding companies when they apply tax benefits in special administrative regions.

The draft law also provides for other amendments. Currently, the document is being reviewed in committees of the State Duma and is scheduled to be considered during the spring session (in May 2023).

1. Investments for IHCs

The principal amendments concern the form of investment which an IHC is required to make to be eligible for tax benefits (article 284.10(4) of the Russian Tax Code):

• constructing a facility (facilities) of social and cultural, transport, energy, housing and utility infrastructure where the facility is subsequently transferred into either state or municipal ownership in Kaliningrad Region or Primorie Territory within 6 months after the 3-year period expires for applying the benefits;

• remodelling or technical retrofitting of the above facilities where the results of the work are transferred to a region, territory or municipality;

• transferring motor vehicles (except for passenger cars), equipment, tools and appliances into ownership to be used at the above facilities;

• making voluntary monetary contributions and donations to special-purpose organisations engaged in the operation of the above infrastructure facilities. Regional government will approve the list of such organisations and the procedure of investment.

The transfer of property and the results of work into state or municipal ownership will not be subject to VAT.

An IHC will be able to agree in advance the forms of investment with the regional government. Currently, such prior approval is impossible which creates certain risks for investors. These risks are associated with a refusal by authorities of a constituent entity to recognise investments that have already been made as compliant with the requirements of the Russian Tax Code. For this purpose, an IHC will apply to the government not later than 6 months after it starts to apply the benefits. If the government does not raise any objections, this is regarded as consent. Similarly to today, after the 3-year period expires for applying the benefits, an IHC is required to confirm that it has met its obligation to make an investment.

2. Other proposals

Other pin-point amendments are also being proposed, in particular:

• to offer an opportunity to acquire the status of an IHC within a year to international companies that have been registered in 2023;

• to release a taxpayer from liability for the failure to give notice about a controlled foreign company (CFC) that has changed its domicile for a SAR and acquired the status of an IHC, provided that, under its personal law, it has been acknowledged as an inactive legal entity;

• to ease requirements for personnel and office premises during the first fiscal period for profit tax (instead of the obligation to meet the conditions throughout the whole fiscal period, it is sufficient to ensure compliance on each date when income is received (paid) with respect to which reduced tax rates are applied and on the end date of the fiscal period);

• to extend until 2028 the possibility of using office premises in Vladivostok and Kaliningrad for the purpose of applying benefits.

What to think about and what to do

When choosing a particular form of investment, a company should analyse the potential consequences and risks it may face, specifically when performing construction and/or capital construction work at facilities. These may include: issues of physical resources, regulatory issues (obtaining permission documentation, etc.), and financial and tax matters (deductions of VAT when facilities are transferred into the ownership of the state or a municipality, the requirement for separate VAT accounting, etc.).

Help from your adviser

Pepeliaev Group's team is ready to offer its assistance in analysing the viability and the consequences (including from the perspective of tax and civil legislation) of a specific form of investment, taking into account the specifics of the business, the structure of ownership and assets, and the nature of activity.Якорь: #1

[1] Draft law No. 330129-8.