The Federal target program Development of Pharmaceutical and Medical Industries in the Russian Federation for the period till 2020 and thereafter" approved by the Decree of the Government of the Russian Federation (RF Government) dated 17 February 2011 No. 91 and the State Program of the Russian Federation 'Development of Pharmaceutical and Medical Industry' for 2013 - 2020 approved by the Decree of RF Government No. 305 dated 15 April 2014 provide for the increase by 2020 of the share of medical devices manufactured in Russia up to 40% in monetary terms.1
This strategical goal is being attained by two principal methods:
- providing for incentives for localization of production facilities by foreign manufacturers in the Russian Federation, including granting of subsidies for organization of clinical trials and manufacturing of medical devices; and
- restriction for admission of medical devices of foreign origin to participation in the procurement of for state and municipal needs.
These strategies have had certain positive results: in particular, according to reports issued by the Federal State Statistics Service, from January through July 2016 domestic manufacturers produced 12% more medical devises than in the same period of 2015 and in 2015 the volume of export of medical devices increased for 16%.2
1 Restrictions on the admission of certain foreign medical devices to public procurement
Under Article 14 of the Federal Law No. 44-FZ 'On the Contract System in the Area of Procurement of Goods, Works and Services for Public and Municipal Needs' (the Law No. 44-FZ) RF Government may impose a ban on the admission of goods originating from foreign countries and to restrict the admission of such goods for the purposes of the relevant procurement.
The primary regulatory act imposing restrictions on admission of certain types of medical devices originating from foreign states to participation in procurements for state and municipal needs (public procurement) is the Decree of RF Government No. 102 dated 5 February 2015 (as amended by the Decree of RF Government No. 337 dated 22 April 2016).
Under the amended Decree No. 102, in the course of procurement of certain medical devices manufactured outside Russia, the customer shall reject all applications (final bids) with offers to supply medical devices manufactured in foreign states (other than the member-states of the Eurasian Economic Union (EAEU)), provided that at least two applications have been submitted meeting the requirements of the procurement notice and (or) tender documentation (final bids), which simultaneously:
- contain offers to supply one or several types of medical devices included in the List attached to Decree No. 102 (the List) and manufactured in any of the EAEU member-states;
- do not contain offers to supply the same medical device from the same manufacturer or manufacturers of the same group of persons, as defined in Article 9 of the Federal Law 'On Protection of Competition'.
The country of origin of a medical device shall be confirmed by a certificate of origin under the form ST-1 issued by the competent authority (organisation) of the member-state of the EAEU and in accordance with the criteria for determining the country of origin established by the Rules being an integral part of the Agreement on the Rules for determining the country of origin of goods in the CIS dated 20 November 2009.
The country of origin shall be deemed the country – member-state of this Agreement (i.e. Russia) in the territory of which the goods are completely manufactured or underwent substantial processing.
According to the Schedule 1 to the Agreement for medical, optical and chirurgical instruments and apparatus, their parts and accessories the criteria for technological and manufacturing operations which are sufficient for the respective devices to be deemed manufactured in Russia (or another member-state of the Agreement) are as follows: manufacturing in the course of which the price of all the materials of foreign origin shall not exceed 50% of the price of the end product (medical device).
The respective prices shall be calculated as follows:
- for materials of foreign origin – according to the customs value of such materials at their import to the country in the territory of which the end product shall be manufactured (Russia or another member-state of the Agreement) or according to the price of their first sale within the country in the territory of which the end product shall be manufactured, proved by documents;
- for the end product – the ex-works price.
Furthermore, under the Decree of RF Government No. 102 dated 5 February 2015, medical devices included into the List and medical devices not included therein may not be a subject of the came contract (same lot).
If at the conclusion of a contract the applications containing offers to supply certain medical devices included in the List (except for the EAEU member-states) were rejected in accordance with the restrictions, in the course of the contract performance the replacement of a medical device with a medical device originating not from the EAEU member-state as well as the replacement of the medical device manufacturer shall be not allowed.
If an application (final bid) containing an offer to supply certain medical devices included in the List and manufactured in foreign states (save for the EAEU member-states) is not rejected the conditions for access to public procurement shall apply established by the decree of Ministry of economic development of the Russian Federation dated 25.03.2014 N 155 (as amended). Which means that the participants of the public procurement tender that supply medical devices originating from the EAEU shall have the preferences applied as follows:
- if the public procurement tender is conducted in the form of competition (конкурс), request for proposals (запрос предложений) or request for quotations (запрос котировок), a tender bid that contains an offer for supply of medical devices manufactured in the EAEU shall be appraised with application of 15% decreasing quotient to the price specified in the respective tender bid while the supply contract shall be concluded at the price proposed in the tender bid by the winner of the tender. For example, there are 2 tender bids – one for supply of medical devices of Chinese origin at the price of 90,000 rubles and another for supply of medical devices of Russian origin at the price of 100,000 rubles. The winner shall be the latter since the price in its tender bid shall be appraised as 100,000 rubles – 15% = 85,000 rubles, while the contract shall be concluded for the initial price in the tender bid - 100,000 rubles;
- if the public procurement tender is conducted in the form of an auction (аукцион), the winner of the tender shall be determined in regular order under the auction conditions, but the contract with such winner shall be entered into at the price of its tender bid decreased for 15%, unless the winner's tender bid is for supply of medical devices originating from Russia or another EAEU member-state. For example, there are 2 tender bids – one for supply of medical devices of Chinese origin at the price of 100,000 rubles and another for supply of medical devices of Russian origin at the price of 110,000 rubles. The winner shall be the former since it proposed the lowest price but the contract shall be concluded for the initial price in the tender bid (100,000 rubles) – 15% = 85,000 rubles.
For application of these preferences the country of origin of medical devices should be confirmed by the declaration issued by the participant of the public tender.
The abovementioned conditions for access to public procurement shall not apply in the following cases:
- within one tender (lot) supply of goods is contemplated only a part of which is included in the list attached to the decree of Ministry of economic development of the Russian Federation dated 25 March 2014 No. 155 (e.g. the tender is for supply of medical devices plus some goods that are not included in this list);
- the tender is deemed frustrated in accordance with the Federal Law No. 44-FZ 'On the Contract System in the Area of Procurement of Goods, Works and Services for Public and Municipal Needs' (Law No. 44-FZ);
- the tender bids do not contain offers for supply of goods manufactured in the territories of the EAEU member states;
- within one auction (lot) the winner thereof offers in its tender bid supply of both the goods manufactured in the territories of the EAEU and the goods of foreign origin and the price of the former amounts to more than 50% of the total price of the goods according to the tender bid;
- within one competition (lot), request for proposals or request for quotations the winner thereof offers in its tender bid supply of both the goods manufactured in the territories of the EAEU and the goods of foreign origin and the price of the former amounts to less than 50% of the total price of the goods according to the tender bid;
- the goods are procured from a single supplier (i.e. are unique).
2 Subsidies to the Russian manufacturers of medical devices
On 1 October 2015, RF Government adopted the decrees on the procedures and conditions for granting subsidies from the federal budget to Russian organisations for partial compensation of costs:
- incurred in the course of conducting clinical trials of medical devices included in the list of implantable medical devices for provision of medical assistance under the program of state guarantees of free medical aid to citizens (the Decree No. 1046). The subsidies may be granted to Russian organisations possessing valid permits to conduct clinical trials of medical devices included in the list of medical devices implanted into the human body when providing medical assistance under the program of state guarantees of free medical care to citizens approved by RF Government;
- related to the organisation of high-tech manufacturing of medical devices in such areas as: medical devices implanted in the human body; disposable medical devices; consumables for medical devices; technical means of rehabilitation related to medical devices for handicapped persons and persons with disabilities; installations for high efficiency ion beam radiation therapy; medical devices for personal remote monitoring of patients; medical devices for ophthalmology (the Decree No. 1048). The subsidies are granted to Russian organisations with total revenue from the sale of medical devices of own production during 2012 - 2015 years in the amount not less than 100 million roubles and possessing at least one valid registration certificate for the medical devices manufactured thereby.
The subsidies are provided upon an application submitted by a Russian organization (with the business plan and other required documents attached), on the basis of the agreement entered into between Minpromtorg and the applicant.
- The Decrees No. 1046 and No. 1048 establish the following general rules for granting subsidies:
- an organisation applying for a subsidy must be registered in the Russian Federation and possess a license for manufacturing of medical devices (according to the Decree No. 1048);
- the business plan must stipulate the release into circulation of a medical device manufactured under the project not later than within 3 years after entering into the agreement for granting of the subsidy;
- subsidies are granted in respect of the costs of Russian organisations actually incurred on or after 1 January 2015, confirmed by documents, related to the project and provided for by the business plan;
- subsidies will cover up to 50% of the total costs in the total amount of up to 200 million rubles (5 million - in case of clinical trials of implantable medical devices) per a legal entity.
3 Special Investment Contract
A special investment contract as a mechanism of incentives for domestic manufacturers was introduced by the Federal Law, dated 31 December 2014, No. 488-FZ 'On Industrial Policy in the Russian Federation' (the 'Law No. 488-FZ') that became effective on 30 June 2015.
Such contract is entered into between an investor and the Russian Federation or a constituent entity of the Russian Federation and provides for:
- the investor's undertakings within the period established by the contract to establish or upgrade, and(or) set up industrial production in the territory of Russia (including the continental shelf and exclusive economic zone of the Russian Federation), and
- the other party's (represented by the competent authority) undertaking within the said period to implement incentive measures provided by the laws of the Russian Federation or the law of the constituent entity of the Russian Federation effective at the time of the conclusion of the special investment contract.
The main advantages of a special investment contract (SPIC) include:
- incentives for industrial activities to be applied during the SPIC to the investor and(or) other persons mentioned in the SPIC;
- exemption of the investor and(or) other persons specified in the contract during the contract term from the laws (except for laws adopted in the performance of international treaties of the Russian Federation, and regulations of the Eurasian Economic Union) that become effective after the contract execution and establish prohibitions and restrictions on the performance of the contract or alter the mandatory requirements to products being manufactured and(or) to the related processes of design, manufacturing, construction, installation, operation, storage, transportation, marketing and disposal;
- stability of the overall tax burden on the income of the investor and(or) other persons specified in the contract as compared with the overall tax burden at the execution of such contract, during the entire contract term.
A SPIC is entered into for the term within which the investment project shall start gaining operational profit in accordance with the business plan of the investment project, increased for 5 years, with the maximum term of 10 years.
The procedure for entering into a SPIC with the Ministry for Industry and Trade of the Russian Federation (Minpromtorg) or another federal executive authority and the standard form thereof are approved by the Decree of RF Government dated 16 July 2015 No. 708 (the Rules for Entering into a Special Investment Contract).
In order to enter in a SPIC an investor must submit with Minpromtorg an application according to the form approved by the latter with the attachment of the documents and information specified by the Rules for Entering into a Special Investment Contract. The investor should attach, in particular, the list of incentive measures provided for by the Law No. 488-FZ or other federal or regional and municipal laws that the investor proposes to be included in a SPIC.
A SPIC with the constituent entities of the Russian Federation and municipalities shall be entered into according to the procedure established by the regulatory legal acts of the relevant constituent entities and municipalities.
The incentives that the investor that entered into a SPIC is eligible for include, in particular, application of 0% tax rate with respect to the company's profit tax to be paid to the budget of the Russian constituent entity in which the investment project under SPIC is implemented, starting from the tax period in which the first profit from sales of goods manufactured as the result of the regional investment project implementation is gained and through the end of the term of the SPIC, but not later than the end of 2025 (Article 284.3 p. 3 pp. 3 of the Tax Code of the Russian Federation).
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.