Tax benefits for investment projects in the Far East

On 30 September 2013 Federal Law No. 267-FZ (the “Law No. 267-FZ”) came into force. Law No. 267-FZ has established tax benefits for regional investment projects.

A Regional Investment Project (“RP”) is a project that is implemented in the Far East and Eastern Siberia regions and that meets a number of conditions, in particular, a specific volume of capital investments2  and the type of activity3  (an “Initial RP”).

The benefits established by the law in question are reflected in the table:

Participants of these RPs have a new tax benefit – the regional profit tax rate is reduced to 10% for the payback period for capital investments in the implementation of the RP5. 

The time period6  for which the benefits are applied differs depending on the chosen procedure for applying preferential tax rates; please see the table below. 

Law No. 144-FZ has not changed the benefit in relation to MET.

PG comments: The above amendments are aimed at rescuing the institution of regional investment projects and at making it more attractive for investors. However, despite eliminating almost all the problematic provisions of Law No. 267-FZ listed above, the provision has been retained regarding additional assessment of profit tax for the whole period during which an investment project is implemented if the declared volume of capital investments has not been reached.

The participants of these RPs can be investors who invested capital in the amount of:

• RUB 50 million within a period not exceeding 3 years from the date when the first capital investment was made, but not earlier than 1 January 2013, and not earlier than 3 years before the company applied for the benefits;
• RUB 500 million, provided that the capital investments are made within a period not exceeding five years from the date when the first capital investment was made, but not earlier than 1 January 2013, and not earlier than five years before the company applied for the benefits.

The profit tax and MET benefits applied to active RP participants are in general similar to the benefits described above with regard to initial RP participants, except for the following specific features:  

• the procedure for obtaining the status of an RP participant (a declarative procedure, also no need to be added to the register, after the project starts to be implemented);
• there is no opportunity to choose the procedure for applying the preferential tax rates (it is impossible to apply the preferential rates based on the payback of capital investments);
• the duration of benefits for capital investments of RUB 50-500 million – 1 January 2029 for projects with capital investments exceeding RUB 500 million – 1 January 2031;
• the constituent entities of the Russian Federation have no right to increase the minimum volume of capital investments, and to add other requirements to those that are already established.

PG comments: Introducing this category is aimed at creating equal conditions for the participants of projects are already being implemented in a region and will have the same economic effect as Initial RPs. 

This type of RP is established for the purpose of implementing Federal Law No. 488-FZ “On industrial policy in the Russian Federation” dated 31 December 2014. 

Applying this type of RP is based on entering into a special investment contract (a “SIC”) according to the procedure provided for this Federal Law.

MET benefits are not applied to this category of RP participants.

The main specific features of applying profit tax benefits for this type of RP are as follows:

• the list of investment projects is determined pursuant to the Federal Law “On industrial policy”;
• a constituent entity of the Russian Federation has a right to reduce the regional tax rate to 0% (at the same time, the tax rate payable to the federal budget is 0%) for the period until the SIC expires, but not later than 2025 inclusive;
• a special deprecation coefficient (not exceeding 2) is applied to depreciable fixed assets included in deprecation groups 1-7 when such assets are produced in accordance with terms and conditions of a special investment contract;
• there is a separate stipulation regarding stabilisation of the taxation regime for the period when a special investment contract is implemented.

Pursuant to Federal Law No. 252-FZ: 

• the Russian Government has an opportunity to create areas of advanced social and economic development (often referred to as “priority development areas” (PDAs)) on the territories of municipal units where there is a single dominant employer (so called “monocities”) in which there are risks of a deterioration in the social and economic situation, as well as in monocities with a stable social and economic situation that are included in a list to be established by the Russian Government. Such PDAs can be created starting from as early as 1 January 2017; 
• a preferential regime for business operations provided for by the law “On the free port of Vladivostok” (FPV), except for controlling the entrance of persons, vehicles, cargo, goods and animals in crossing points, covers a number of municipal units outside the Primorie Territory. Namely, this law covers Petropavlovsk-Kamchatskiy and Vanino (Khabarovsk Territory), as well as the city districts of Korsakov (Sakhalin Region) and Pevek (Chukotka Autonomous District).

5. The right to choose the procedure for applying benefits in this case is provided to the taxpayer. The information regarding which procedure for applying tax rates has been chosen is specified in the application to include the RP participants in the register.

6. The duration of the preferential tax rates depends on the volume of capital investments.

7. The laws of constituent entities of the Russian Federation can shorten the time period for which the reduced tax rate is applied for all or for certain categories of participants.