Under The Federal Law dated 09.07.1999 N 160-FZ "On Foreign Investments in the Russian Federation" (the Law No. 160-FZ) a foreign investor is deemed:
- a foreign legal entity or organization which is not a legal entity, entitled in accordance with the law of the country of its incorporation to make investments in Russia;
- a foreign national entitled in accordance with the law of the country of his/her citizenship to make investments in Russia;
- a stateless individual permanently residing outside the territory of Russia entitled in accordance with the law of the country of his/her permanent residence to make investments in Russia;
- an international organization entitled in accordance with an international treaty of the Russian Federation to make investments in Russia;
- foreign states in accordance with the procedure established by Russian federal laws.
Foreign investors under the Law No. 160-FZ are granted the most favored nation treatment: the legal regime for their activity and use of profits from investments may not be less favorable than the legal regime provided for Russian investors. At the same time, some federal laws provide for:
- exclusions of restrictive character for foreign investors from this regime – to the extent which is necessary for protection of the constitutional system, morality, health, rights and lawful interests of other persons, providing for the state defense and security; and
- exclusions of incentive character for foreign investors from this regime in the form of concessions in the interests of social and economic development of the Russian Federation.
International treaties of the Russian Federation provide for similar regime for foreign investors in Russia: in particular, Article 10 of the Agreement between the Russian Federation and the European Union of 1994, states that "parties provide to each other the most favored nation treatment specified in Art. 1 p. 1 of GATT". The legal regime for foreign investors in Russia is thus characterized by the complex of guarantees, concessions and restrictions that are described below.
I. Guarantees for foreign investors
Foreign investors in Russia are granted a number of guarantees according to the Law No. 160-FZ, in particular:
a. The right for compensation of damages caused to a foreign investor as the result of illegal actions (omission) of state authorities, municipal authorities or officials of such authorities;
b. The rights to make investments in any forms not prohibited by Russian law (subject to preliminary approval of transactions being entered into by foreign states, international organizations (except for international financial organizations included in the list approved by the Government of the Russian Federation) or entities under control of the latter for acquisition of the right to dispose directly or indirectly of more than 25% of the total number of votes granted by voting shares (participatory interests) in the charter capital of a Russian company or another right to block decisions of the management bodies of a Russian company, according to the Federal Law "On procedures for foreign investments in companies of strategic significance for national defense and state security");
c. The guarantees of compensation to a foreign investor or profit-making entity with foreign investments of the price of property being confiscated, and in the event of nationalization – of other damages as well;
d. The guaranty for a foreign investor or a profit-making entity the charter (share) capital of which consists of more than 25% of foreign investors‟ contributions or implementing a priority investment project against a detrimental change of Russian legislation: in particular, changes of the rates of federal taxes (except for excise duties, VAT for goods manufactured in Russia and contributions to the state extra-budgetary funds (except for contributions to the Pension Fund), increase of the overall tax burden for implementation of priority investment projects or establishment or prohibitions and restrictions for foreign investments shall not apply within the term of the payback period of the investment project but no more than 7 years from the date of start of financing of such project at the account of foreign investments;
e. the guaranty of use in the territory of Russia and transfer over its borders of income, profit and other legally gained monetary amounts in foreign currency in connection with investments made, subject to payment of taxes and duties provided for by Russian legislation;
f. the right for unimpeded export from Russia of property and information in documentary form or on electronic media that have been initially imported in Russia as foreign investments (without quotation, licensing and application of other non-tariff measures).
II. Incentives for investors
Foreign investors are granted with certain customs and tax incentive in accordance with Russian legislation. Furthermore, both foreign and domestic investors are granted in Russia with the incentives depending on the territory where they conduct their activities, as well the types of activities.
1. Customs incentives for foreign investors
According to the Decision of the Government of the Russian Federation dated 23.07.1996 No. 883 "On the incentives for payment of import customs duties and VAT with respect to goods being imported as contributions to the charter capital of enterprises with foreign investments" goods being imported in the customs territory of the Russian Federation as a contribution of a foreign founder to the charter (share) capital are exempted from customs duties provided that such goods are:
- not excisable goods;
- basic production assets; and
- imported in terms provided for by the constitutive documents of the legal entity in question for formation of the charter (share) capital.
Excisable goods in accordance with Article 181 of the Tax Code of the Russian Federation (the "Tax Code") are deemed:
1) ethyl alcohol made of all types of raw materials;
2) alcohol containing products (solutions, emulsion, suspension and other types of products in liquid form with a volumetric share of ethyl alcohol over 9 per cent), except for certain types of products;
3) alcoholic products according to the list approved by the Government of the Russian Federation;
5) tobacco products;
6) passenger vehicles;
7) motorcycles featuring engine power rating over 112.5 kW (150 h.p.);
9) diesel fuel;
10) motor oil for diesel and/or carburetor (injector) engines.
11) direct-distillation petrol;
12) furnace fuel material for domestic use manufactured from diesel fractions of direct distillation and/or of secondary origin that boil within the temperatures interval from 280 to 360 degrees Celsius;
13) benzol, paraxilol, ortoxylen;
14) aviation kerosene oil;
15) natural gas (in cases provided for by international treaties of the Russian Federation);
Importation into the customs territory of the Russian Federation and other territories under its jurisdiction of technological equipment (including components and spare parts thereto) according to the list approved by the Government of the Russian Federation analogues of which are not manufactured in Russia and which is imported as a contribution to the charter (share) capitals of organizations, is exempt from VAT (Article 150 p. 7 of the Tax Code).
2. Regional tax incentives
Most constituent entities (regions) of Russia provide tax concessions to investors, in particular, reduced profit tax and property tax rates for companies. The eligibility criteria typically require that that the project fits in with regional business priorities and a minimum amount of investment. Such tax concessions are normally granted for a period not exceeding the payback period of the investment project, and the amount of the tax savings realized, cannot exceed the amount of the initial investment under the project. Additional conditions for eligibility for concessions may be established by regional authorities, in particular, the obligations for employing individuals residing in the region, for developing infrastructure, etc.
For example, investors – legal entities, carrying out investment projects in the territory of Moscow Region, have been granted the following incentives:
(i) decrease of the company profit tax rate by 4.5% for a period from three to seven years, depending on the type of project;
(ii) decrease of the company property tax rate, with respect to the assets manufactured and/or bought, as well as with respect to the fixed assets, in the event that the assets in question are expanded, further equipped, reconstructed, modernised and retooled, while implementing:
- a strategic investment project: up to 0% – within the first tax period, 0.5% – from the second through the fifth tax periods, 1.5% – from the sixth through the eighth tax periods;
- a priority investment project: up to 0% – within the first tax period, 1.5% – from the second through the third tax periods, 1.5% – from the fourth through the fifth tax periods;
- a significant investment project: up to 0% – within the first tax period, 1.1% – from the second through the third tax periods.
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