A law has been adopted to protect and encourage capital investments in Russia

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Pepeliaev Group advises that, starting from 1 April, Federal Law No. 69-FZ dated 1 April 2020 “On protecting and encouraging capital investments in the Russian Federation” came into force. The Law regulates relationships in terms of investments that are made based on an agreement for the protection and encouragement of capital investments. At the same time, amendments have been made to the Russian Tax and Budgetary Codes (respectively, Federal Laws No. 70-FZ and No. 71-FZ, both dated 1 April 2020).

A special investment regime has been introduced for companies that are implementing investment projects using a new mechanism - an agreement for the protection and encouragement of capital investments (an “APECI”).

The parties to an APECI

The agreement is entered into between a private entity, the company that is implementing the project (a Russian legal entity, including a project company) and a public-law entity, which is the constituent entity of the Russian Federation within which the investment project is intended to take place (the involvement of the Russian Federation and/or of a municipal unit is also possible).

Provision is made for the opportunity to enter into an APECI both further to the initiative of private entities (a private project initiative, implemented under an application procedure) and at the initiative of public executive bodies (a public project initiative, implemented under a declared competitive procedure).

The subject matter of an APECI

The subject matter of the agreement is the implementation of a new investment project in a sector of the economy other than the following:

  • the gambling industry;
  • the manufacture of tobacco and alcohol products;
  • the production of oil and gas;
  • wholesale and retail trade;
  • the activity of financial institutions; and
  • the construction of residential property, office blocks and shopping malls.

In exchange for capital investments, investors can have measures of state support granted to them in the form of having the costs reimbursed on the energy, transport, utilities, social and digital infrastructure necessary for the investment project to be implemented, as well as costs on the payment of interest on loans and borrowings raised for this.

Depending on the amount of the capital investments, stabilisation clauses will also be granted to investors, guaranteeing that for specified periods no instruments or decisions will be applied that worsen the conditions for carrying out operations associated with the implementation of the project, and in particular acts or decisions:

  • to change the measures of state support;
  • to amend the procedure for granting rights to a land plot;
  • to establish additional obligations and reduce the scope of the rights of owners of land plots;
  • to amend procedures associated with town-planning activities, and so on.

Where the volume of capital investments is at least RUB 10 billion, the subject matter of a stabilisation clause can also be:

  • an increase of the rates of export customs duties;
  • an increase of the rates or expansion of the items to be taxed when determining the amount of fees for a negative impact on the environment or for the use of bodies of water, or for recycling and environmental fees.

The duration for which a stabilisation clause is applied cannot be more than:

  • 6 years - if the investment is RUB 5 billion or less;
  • 15 years - if the investment amounts to more than RUB 5 billion but less than RUB 10 billion;
  • 20 years - if the investment is RUB 10 billion or more;

In certain conditions, the above timeframes can be subject to a one-time extension of six years.

At the same time, instruments or decisions to amend legislation on taxes and levies, to increase rates of export customs duties and to change state support measures do not apply for the entire period stipulated by the APECI, while the stabilisation clause has effect, with respect to other instruments or decisions, only for 3 years from the date on which they enter into force.

Amendments to the Russian Tax Code in terms of stabilising tax law relationships

The amendments do not provide for any tax benefits to be granted to an investor.

Article 5 of the Russian Tax Code has been supplemented with clause 4.3 providing for a stabilisation provision with respect to the effect of legislative instruments concerning taxes and levies. The area in which the provision has effect depends on the nature of the party to the APECI on the public side.

No.The party to the APECIArea in which the stabilisation provision has effect
1Constituent entity of the Russian Federation
  • amendment of the procedure for determining the tax base, tax rates, tax benefits, and the procedure and/or deadlines for payment in relation to corporate property tax and transport tax.
2The Russian Federation and a constituent entity of the Russian Federation

in addition to point 1:

  • amendment of the taxable item, of the procedure for determining the tax base, the tax period, tax rates, the calculation procedure, and the procedure and/or deadlines for payment in relation to corporate profit tax;
  • amendment of deadlines for payment and/or the procedure for a refund in relation to VAT;
  • the introduction of new taxes and/or levies.
3Constituent entity of the Russian Federation and a municipal unit

in addition to point 1:

  • amendment of tax rates, tax benefits, and the procedure and/or deadlines for payment in relation to land tax
4The Russian Federation, Constituent entity of the Russian Federation and a municipal unitpoint 1 + point 2 + point 3

Specific aspects of the application of a tax stabilisation provision:

  • it does not extend to newly introduced taxes and levies if they are introduced to replace a payment that has been repealed where the taxable item was the same;
  • it does not extend to instruments establishing benefits for corporate property tax, transport tax and land tax, as well as the conditions and timeframes for them to apply and cease to have effect;
  • provided that separate accounting is kept of taxable items, the tax base and amounts of tax to be paid when the ASECI is being performed and when other operations are undertaken, as well as separate accounting of income (expenses).

What to think about and what to do

We recommend that companies should:

  • assess the economic feasibility of applying the proposed conditions of tax stabilisation, land use and town-planning operations, and of having measures of support granted;
  • examine the possibility of entering into an APECI (including with respect to projects that have begun);
  • monitor the adoption of regulatory instruments (planned by 1 July), bearing in mind that the full-fledged operation of the model will be launched only after the Russian Government has approved the subordinate legislation. However, in the current situation, this work is unlikely to be done on time.

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; assistance with the entry into an APECI, including participation in the negotiation process with public executive bodies; assistance in dealing with tax authorities and other regulatory bodies; and other legal services during your production operations.

We will continue to keep you updated about the development of legislation aimed at encouraging investment activity in the Far East and in other regions of Russia.

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