The federal benefit for movable property will be abolished The institution of an investment tax deduction will be introduced into the Russian Tax Code

Pepeliaev Group advises that the Russian Government has submitted to the State Duma a draft law[1] providing for an investment deduction to be established with respect to profit tax and for significant amendments to the application of the federal benefit relating to movable property starting from 2018[2].

The federal movable property tax relief is to be abolished

According to article 381(25) of the Russian Tax Code (the "Tax Code"), movable property booked as fixed assets after 1 January 2013 is not subject to property tax. From 2018 the powers to grant this benefit will be delegated to Russia's constituent entities.

Initially, when the draft law was being considered, the delegation was planned to be postponed until 1 January 2019. However, by the second reading the legislature’s position had changed drastically. This resulted in the following provision being enshrined in the Code (the new articles 381.1(2) and 380(3.3) of the Tax Code):

1. Starting from1 January 2018, the tax relief prescribed by article 381(25) of the Tax Code with respect to movable property will be applied only if a constituent entity (region) adopts a law to this effect.

If the constituent entity chooses not to adopt the law the tax rate set by each constituent entity for movable property booked as fixed assets after 1 January 2013 in 2018 cannot exceed 1.1%;

2. Constituent entities are given the opportunity by adopting the relevant laws to set additional tax benefits (all the way up to a full exemption) with respect to:

  • Movable property booked as fixed assets after 1 January 2013 and produced 3 years ago or later.
  • Property classified by the law as innovative high performance equipment.

Therefore, if regional authorities of the constituent entity are planning to keep the benefit with respect to movable property they should amend local laws accordingly. Otherwise the benefit actually ceases to apply.

Комментарий ПГUntil now most regions have not considered keeping (introducing) this benefit as local authorities expected it to be preserved at the federal level.[3]As far as we are aware, decisions to keep the benefit have only been adopted in Moscow Region and in Lipetsk[4] Region. Ivanovo Region and Nizhny Novgorod[5] Region are also planning to keep the benefit.

Some regions have already set reduced rates for 2018 (as compared with 1.1%): Kamchatka Territory (0.6%) and Tyumen Region (0.55%)[6].

In Yaroslavl Region[7] for movable property booked as fixed property on 1 January 2013 and later a tax rate of 1.1% will be established starting from 2018. At the same time companies which booked their movable property as fixed assets on 1 January 2016 and later will be exempt from tax on such property for four tax periods starting with the tax period when such property was booked.
In Astrakhan Region[8] the new law concerns rates for movable property booked as fixed property on 1 January 2013 and later by companies whose business is related to producing raw hydrocarbons at offshore fields located in the Russian part (sector) of the Caspian seabed. For them the tax rate for 2018 has been established at 0.5%.

We regret to state that these unplanned changes to the taxation of movable property in fact repudiate the effect of the four-year moratorium on increasing the tax burden increase that was introduced by the Russian President at the end of 2014. It once again places a question mark over the stability of the Russian tax system with respect to guarantees that tax conditions for business will remain unchanged.

Investment tax deduction

The law provides for a new article 286.1 ‘Investment tax deduction’ to be introduced into the Tax Code. It is contemplated that the respective provisions will be applicable until 31 December 2027 inclusive.

According to this article, provided that the relevant regional law is adopted, taxpayers will be entitled to reduce profit tax by the amount of expenses on the acquisition of new fixed assets and/or on the reconstruction (upgrade, technical re-equipment) of the existing fixed assets.

The investment tax deduction may be allowed with respect to the fixed assets included in depreciation groups 3 to 7 starting from the period when the fixed asset is commissioned or when its initial value is changed. The fixed assets must be located within the Russian constituent entity that has adopted the relevant law.

Not everyone is eligible for the tax deduction in question. According to article 286.1(11) of the Russian Tax Code the groups of taxpayers that are not eligible for the deduction will include (without limitation): (i) entities participating in the regional investment projects; (ii) residents of special economic zones; (iii) participants of a free economic zone, and also (iv) foreign companies that are considered to be Russian residents. The amount of the tax (advance payment) accrued for a consolidated group of taxpayers should not be reduced by the amount of the investment tax deduction.

In addition, a number of restrictions have been additionally established for the tax deduction, in particular:

  • The tax payable to the regional budget must be calculated at the rate at least 5%[9];
  • The taxpayers who have exercised the right to an investment tax deduction will not be able to apply bonus depreciation with respect to the relevant assets and to book the depreciation when the profit is taxed;
  • For any disposal of an item (other than liquidation) with respect to which a taxpayer has exercised its right to receive the tax deduction before the period of the effective use of such item expires, the taxpayer will have to reinstate the unpaid tax amount and repay it to the government together with the penalty accrued. The taxpayer will be entitled to reduce the profits from the sale of such fixed asset items by the amount of their initial cost only if the tax amount is reinstated.

The regional law may otherwise restrict the amount of the deduction, the range of persons eligible for it, and categories of fixed assets.

Комментарий ПГ
Please be advised that it is not the tax base that is reduced by the amount of the expenses, but the tax amount, which makes the benefit more advantageous compared with other benefits. At the same time, for a decision to use the benefit to be taken, the efficiency needs to be calculated taking account of the factors described above.

Owing to the introduction of provisions on the investment tax deduction, several other articles of the Tax Code will be supplemented, including:

  • Article 88 allowing tax authorities to demand during a desk tax audit documents confirming the company’s eligibility for a tax deduction;
  • Article 105.14(2) of the Tax Code with respect to deeming that the transaction is controlled if at least one party to the transaction has been receiving the tax deduction within the tax period in question[10].

Комментарий ПГ

Whether to introduce the tax deduction is left solely to the discretion of Russian regional authorities. According to our forecasts with regard to the current economic environment it is highly unlikely that this tool will be applied everywhere. We also believe that the regions that will decide to introduce the investment tax deduction will the use the granted possibility to enact additional restrictions for this tax deduction in their regional laws.

When a Russian constituent entity pursues an active investment policy, a corresponding regional law introducing the benefit with respect to movable property and/or the investment tax deduction may be adopted after 1 December 2017 and such new provisions will have retroactive force as they improve the taxpayers’ position (article 5(4) of the Tax Code).

Help from your adviser

Pepeliaev Group's lawyers have extensive experience of safeguarding the rights and lawful interests of clients in the area of establishing and applying tax benefits at the federal and regional levels. Our team is ready to provide legal assistance to companies in connection with the anticipated changes to the movable property tax benefit regime and the introduction of the investment tax deduction.

[3] For example, according to the responses the Chelyabinsk Regions and Udmurtia local authorities provided to requests from the United Leasing Associations relating to keeping the movable property tax relief (http://assocleasing.ru/novosti/451 & http://assocleasing.ru/novosti/453).

[4]Published previously https://www.pgplaw.ru/analytics-and-brochures/alerts/regional-tax-benefits-on-personal-property-in-2018/ Law No. 159/2017-ОZ dated 3 October 2017 (Moscow Region) and Law No. 106-ОZ dated 14 September 2017 (Lipetsk Region).

[5] Resolution No. 673 ‘On approving key areas of focus in the tax and state budget policies of Nizhny Novgorod Region for 2018 and for the planning period of 2019 and 2020’ of the Nizhny Novgorod Government dated 13 September 2017.

[6] Law No. 147 dated 2 October 2017 (Kamchatka Territory) and Law No. 74 dated 24 October 2017 (Tyumen Region).

[7] Law No. 44-Z dated 31 October 2017 ‘On amending certain items of tax legislation of Yaroslavl region’.

[8] Law of Astrakhan Region No. 60/2017-ОZ dated 31 October 2017

[9] The tax payable to the federal budget may be reduced to zero.

[10] The above transactions are considered controlled if the amount of income received under the transactions between the parties in question within the corresponding calendar year exceeds RUB 60 million.

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