Russian Federation: Moscow Extends The Range Of Tax Reliefs As The Russian Government Plans A Moratorium

Last Updated: 18 October 2017
Article by Anastasia Stepanova and Alexandr Bortsov

A number of laws that extend the range of tax reliefs available to companies registered in the Moscow region were adopted in July. Below we take a closer look at the most important of them.

1. Reliefs for participants in regional investment projects1

The mechanism for granting tax reliefs to participants in regional investment projects was extended to cover all regions of Russia back in June 2016.2 In regions of the Far East and the Transbaikal area, an application-based process is established for the utilization of reliefs, while participants in investment projects carried out in other regions must be included in the register of regional investment projects ("the Register") in order for reliefs to be applied.

The scale of the reliefs and the conditions for applying them as far as taxes payable to the regional budget are concerned are to be laid down in regional legislation. Most regions have already passed laws enabling tax reliefs to be applied from 1 January 2017: this often means a reduction in the regional profits tax rate to 10% instead of 17% and a substantial reduction in the assets tax rate (to 0%).

As far as Moscow is concerned, on 12 July a law was passed under which the regional rate of profits tax was lowered to 10% for participants in regional investment projects. An investment project is deemed to be a regional investment project if, in addition to the general requirements laid down in tax law,3 it meets the following additional criteria:

1. The amount of capital investments made in the project since its inclusion in the register according to the investment declaration is not less than:

  • 300 million roubles within a period not exceeding three years (the relief may be applied in the period from 1 January 2018 to 31 December 2026) or
  • 500 million roubles within a period not exceeding five years (the relief may be applied in the period from 1 January 2018 to 31 December 2027)

It is assumed that investments made before a project was included in the Register would not be taken into account in classifying the project as a regional investment project.

2. The investment project has the status of a priority investment project of the city of Moscow and a Moscow government body has concluded a special priority investment contract (SPIC) in relation to the investment project, or the investment project has after the performance of a SPIC been accorded the status of an industrial complex, a technology park or an industrial park accordingly.

The requirement to obtain priority investment project status and conclude a SPIC in order to be classed as a participant in a regional investment project is somewhat unorthodox and may impede the application of relief. One of the key requirements set by the Moscow Government for participants in priority investment projects and SPICs is for large amounts of investments to be made within fairly short periods of time:

  • For industrial production start-up projects:
    At least 750 million roubles within not more than three years after the assignment of priority investment project status
  • For projects involving the creation of an industrial complex or a technology park:
    At least 1 billion roubles within not more than five years after the assignment of priority investment project status
  • For projects involving the creation of an industrial park:
    At least 3.2 billion roubles within five years

The amount invested in the projects concerned must be confirmed by reference to the date on which fixed assets and/or intangible assets that have been modernized and/or created in the course of the investment project are put into use. It may include investments made over the 12 months preceding the year in which the application for the assignment of the status was submitted. 4

It would appear, therefore, that the requirements for investors wishing to claim reliefs as participants in regional investment projects have been raised: they must have invested a minimum of 750 million roubles in the project (depending on the type of project) and must meet requirements relating to the volume and timing of investments which are established both for SPICs and for regional investment projects.

Given that the regional rate for participants in priority investment projects and SPICs has been lowered to 13.5% (12.5% from 2017 to 2020), it may be worthwhile for participants in large investment projects to seek inclusion in the Register. Parties to a SPIC concluded with the Moscow Government additionally qualify for exemption from assets tax until the SPIC ceases to have priority project status.5 Nevertheless, the advisability of this step must be carefully considered in terms of whether it is possible in practice to meet all the requirements for the application of the tax reliefs and whether the economic effect is sufficient to justify the extra administrative burden for the investor.

2. Reliefs for parties to special investment contracts concluded with the Industry and Trade Ministry6

The Moscow Law of 12 July also establishes a 0% regional profits tax rate for investors that are parties to a SPIC concluded with the Industry and Trade Ministry for the creation or modernization of facilities and/or the start-up of industrial production in the Moscow region. The investment threshold is set at 750 million roubles and may be raised in certain cases. The relief will have effect from 1 January 2018 until 31 December 2025. It will be recalled that the federal profits tax rate will likewise be lowered to 0% under a SPIC with the ministry.

Investors that have concluded a SPIC with both the Industry and Trade Ministry and the Moscow Government will also be eligible for exemption from assets tax until the SPIC ceases to have priority project status.7

3. Reliefs for participants in special economic zones8

The main changes for residents of special economic zones (SEZs) created in Moscow are as follows:

Profits tax

  • The scope of application of profits tax reliefs has been widened – they are now available to residents of any SEZ created in Moscow, rather than only the Zelenograd SEZ
  • The time limit on the law has been lifted – it was previously set to lose force on 1 January 2021
  • A lower regional profits tax rate is established as follows for residents of SEZs:
  • 0% from 1 January 2018
  • 5% from 1 January 2028
  • 12.5% from 1 January 2033
  • Lower regional rates of profits tax are established for SEZ management companies – 12.5% from 1 January 2017 and 13.5% from 1 January 2021
  • These provisions cover legal relations arising from 1 January 2017 onwards

Land Tax

The period of the land tax exemption for residents of a technology development SEZ is increased to 10 years.

Transport Tax

The transport tax exemption for residents and management companies of a technology development SEZ is increased from five to 10 years.

4. Reliefs for sports facilities that include a football pitch (ice rink) and are equipped with spectator stands seating at least 12,000 people9

Changes have been made to lift the restriction on the date of construction or renovation of such facilities for the purpose of claiming assets tax relief equal to 10% of tax due. The relief was previously only available for facilities which were built or renovated after 1 January 2014.

The law takes effect one month after its official publication and applies to legal relations arising from 1 January 2015 onwards, thus allowing the tax base for tax periods from that date onwards to be adjusted.

5. The Government is planning a moratorium on new tax reliefs

During a recent discussion of the draft budget, taxation and customs tariff policies for 2018 and the 2019-2020 planning period ("the Draft"), the chairman of the State Duma Committee on the Budget and Taxes, Andrei Makarov, observed that the use of tax reliefs was ineffective, mainly because the lack of control over the achievable economic effect turned tax policy into a collection of competing reliefs, resulting in lost budget revenue and making the tax system as a whole uncompetitive.

Among the priority tasks noted by the Finance Ministry in the text of the Draft is the need for a moratorium to be imposed from 2018 on the establishment of new reliefs for taxes payable to regional and local budgets and the development of a general methodology for measuring the effectiveness of reliefs. Parallel measures also being considered include the introduction of an investment tax deduction for particular investment programmes and certain other measures to encourage investment activity.10

Work is continuing on raising the efficiency of budget expenditure and analysing available tax reliefs, with the Finance Ministry proposing that tax reliefs and other preferences be viewed through the prism of budget shortfalls, i.e. with reference to tax and non-tax expenditure. Over the next few years we are likely to witness an overhaul of the system of tax reliefs, especially those aimed at encouraging investment.

It should be pointed out that only parties to SPICs are directly protected against legislative changes at present: a SPIC includes a so-called "grandfather clause" guaranteeing the stability of the tax regime for the duration of the contract regardless of any changes that may be made to the law after the conclusion of the contract.

Footnotes

 1 Moscow Law No. 22 of 12 July 2017 "Concerning Special Taxation Provisions for Regional Investment Projects Carried out in the Territory of the City of Moscow".

2 A regional investment project is an investment project whose purpose is the manufacture of goods and which simultaneously meets the conditions listed in Article 25.8 of the Tax Code.

3 Article 25.8 of the Tax Code.

4 Sections 7, 8, 9 and 10 of Appendix No. 5 "Procedure for the Assignment, Confirmation and Termination of the Status of a Priority Investment Project of the City of Moscow" to Decree No. 38-PP of the Moscow Government of 11 February 2016.

5 Moscow Law No. 52 of 7 October 2015, Moscow Law No. 64 of 5 November 2003 and Decree No. 38-PP of the Moscow Government of 11 February 2016.

6 Moscow Law No. 22 of 12 July 2017 Concerning Special Taxation Provisions for Regional Investment Projects Carried out in the Territory of the City of Moscow.

7 Moscow Law No. 52 of 7 October 2015, Moscow Law No. 64 of 5 November 2003 and Decree No. 38-PP of the Moscow Government of 11 February 2016.

8 Moscow Law No. 23 of 12 July 2017 "Concerning the Introduction of Amendments to Certain Laws of the City of Moscow in the Area of Taxation".

9 The Moscow Law "Concerning the Introduction of Amendments to Moscow Law No. 64 of 5 November 2003 "Concerning Assets Tax"" – published on the official website of the Moscow City Duma – http://www.duma.mos.ru – on 21 July 2017

10 Page 45 of the "Encouragement of Investment Activity" section of the Draft Main Objectives of Budget, Tax and Customs Tariff Policy for 2018 and the Planning Period 2019 and 2020

11 August 2017

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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