Russia tries to improve its investment climate through such instruments as agreements on protection and promotion of investments, levying excessive regulatory barriers, facilitating currency control regulation. However, worldwide economic and epidemiologic situation, aggravated by the sanctions and specifics of carrying out business activities in Russia, does not contribute to attracting new investments to the country.

Key Words: Foreign Investments, Stabilization Clause, Compensation for Construction of Additional Infrastructure, Currency Control Liberalization, Business Climate Transformation, Tax Evasion.


The time seems to be hard for the investors contemplating to explore and develop the Russian market. To increase the attractiveness of the investments new legal acts and instruments have recently been implemented.


The Law "On the protection and promotion of investments" (SZPKs) was adopted in April 2020. It provides for (i) stabilization clauses protecting against the increase of the tax burden and worsening of certain conditions of the investment project implementation and (ii) compensation of the infrastructure investments by the state.

The agreement (SZPK) is concluded between a private entity – Russia based company (with possible foreign shareholding) - and a public law entity – subject of the Russian Federation (region), on the territory of which the investment project is supposed to be implemented (with possible participation of the Russian Federation and / or a municipal entity).

SZPKs can be concluded both on the initiative of private entities (private project initiative, implemented through the application procedure) and on the initiative of public authorities (a public project initiative, implemented through the declarative tender procedure)1.

New SZPK regime will not apply to the gambling business, the production of tobacco and alcoholic beverages, liquid fuels, oil and gas, wholesale and retail, construction (modernization, reconstruction) of administrative and business centers and shopping centers (complexes), as well as residential buildings2.

Depending on the volume of capital investments, investors under SZPKs will be offered stabilization clauses that guarantee the non-application of acts (decisions) that worsen the conditions of the investment project implementation such as: (i) on changes in government support measures; (ii) on changing the procedure for granting rights to a land plot; (iii) on the establishment of additional obligations and reduction of the scope of the rights of land owners; (iv) on changing procedures related to urban planning activities, etc3.

The investor of at least 10 billion rubles can also be offered a stabilization clause protecting against (i) an increase in the rates of export customs duties; (ii) increase in payments for negative impact on the environment, utilization and environmental fees.

Stabilization clauses with respect to taxes depend on the level of the public party to the SZPK. Should the agreement be concluded at the regional level, the stabilization clause would cover property tax and transport tax (payable to the regional budget). Should Russia together with the region be the party to the SZPK, the stabilization clause would also apply to profit tax, VAT and any new taxes that may be introduced.

The term of the stabilization clause varies depending on the amount of investment from 6 years for investments that do not exceed 5 billion rubles to 20 years for investments amounting to 10 billion rubles and more. Under certain circumstances, this period may be extended for 6 additional years.

Please note that the acts changing the legislation regarding taxes, increasing the rates of export customs duties and changing state support measures shall not apply throughout the period provided for by the SZPK, while the stabilization clause in relation to other acts shall be valid only within 3 years from the date of their entry into force.

As part of the implementation of the SZPK law, the Prime Minister of Russia signed two government decrees which are the most important by-laws that make it technically possible for the SZPKs to be implemented.

The first approves the rules for concluding the SZPKs with the investors, its standard form, terms and conditions of amendment and termination4. The Ministry of Economic Development will have the right to sign the SZPKs on behalf of the state.

The second determines the procedure for providing compensations for the construction of additional infrastructure - the costs of building and modernizing transport, energy, utilities and information systems necessary for the successful launch of investment projects5. In addition, the federal budget will reimburse the interest on loans and coupon income on bonded loans attracted for investment purposes. Reimbursement of costs is estimated to take from 5 to 11 years depending on the type of infrastructure facility and the terms of the agreement. The maximum amount of reimbursable costs indicated above cannot exceed 50 % of actual expenses incurred in connection with the supporting infrastructure and 100% of actual costs incurred for related infrastructure facilities.

Until April 2021, the system will operate in a "pilot mode" and the agreements will be signed in a paper form. Then, the "Investment" information system is expected to be launched. It will provide support to the investors through the Investment Development Agency and ensure prompt consideration of applications - up to 60 days, as well as a minimum of documentation.

Even though the said law will be beneficial for the investors who, based on different reasons, have already decided to implement their projects in Russia, it could hardly attract new investors since:

  1. it does not provide for new tax benefits or incentives for investors (e.g. reduced tax rates, tax holidays) and infrastructure compensations seem to be lasting in time;
  2. the liability of the public party or parties to a SZPK is generally limited to compensation for actual damage incurred by an investor due to non-compliance of the public party with its obligations under a SZPK (i.e. improper calculation of taxes, application of laws that shall not be applied according to a SZPK). Compensation for lost profit and application of penalties would not be available for an investor;
  3. the stabilization clause does not apply to any new taxes that might replace those specifically mentioned in the agreement;
  4. it is not clear enough whether the investor could conclude a SZPK and enter into an investment agreement offering regional tax benefits.


For a long time, Russia was known for its particularly long and cumbersome procedures and requirements in almost all the spheres of business activity.

However, things surprisingly changed with the beginning of the digital era in Russia.

Over the last years, Russian business community evidences progressive digitalization and simplification of bureaucratic formalities: from registration of the companies to obtaining necessary authorizations and licenses, tax reporting and customs clearance procedures. Paper work is progressively replaced with electronic exchange of documents and filing systems. Interaction with the state authorities becomes more transparent and predictable. "One window" system is implemented for different kinds of applications and services to be rendered by the state.

Russian currency control regulation is progressively liberalized and switches from restrictive to risk-oriented approach. Risk-management systems implemented by the tax and customs authorities allow to decrease the number of unjustified controls and speed up the procedures.

Russian government is interested in setting up a clear legislative perimeter for business activities, namely, with the help of the "Regulatory Guillotine" which is a tool for large-scale revision of current legislation and cancellation of regulatory legal acts that negatively affect the general business climate and regulatory environment. The goal of the "regulatory guillotine" is a total revision of mandatory requirements with an active participation of the business and expert communities. Implementation of "regulatory guillotine" should result into the creation of a new comprehensive system of clear requirements for business entities in all areas of regulation, the removal of the excessive administrative burden on business entities, including the elimination of redundant, outdated and conflicting requirements contained in regulatory legal acts, and the decrease in related risks.

"Business Climate Transformation" is a new mechanism for managing systemic changes in the business environment and a "living" tool that should provide with the maximum feedback from the business. It implies most active involvement of the business community in shaping the reform agenda: from identifying existing problems of doing business in various industries, forming ways to solve them, to assessing the quality of the work of government bodies.

"Business Climate Transformation" allows to accumulate all the initiatives to improve the business environment in a single document, which will ensure comprehensive coordination and control over the implementation of reforms. Road maps approved within the framework of this mechanism are updated on an ongoing basis - twice a year - in order to promptly respond to changes in the macro-economic situation and the priorities of the business community.

Recently, the road map was approved for export operations. It includes measures aimed at modernizing state support of export companies, liberalizing currency regulation, reducing customs duties on foreign equipment and raw materials required for the production of export-oriented goods, digitalizing export procedures, and a number of other initiatives.


Traditional cross-border structuring of investment projects in Russia through tax friendly jurisdictions including Cyprus, Malta, Luxembourg and the Netherlands should lose their attraction due to renegotiation of the DTTs with these countries. The list of countries might be further extended to other jurisdictions like Switzerland and Hongkong.

Renegotiation is completed with Cyprus, Malta and Luxembourg, updated rates coming into force on January 01, 2021. This would affect most of the existing holding structures. Renegotiation with the Netherlands seems to be tough. For the moment, the interest of both parties in reaching a mutually acceptable solution has not been exhausted.

The Russian government wishes to introduce a 15% withholding tax on outbound payments of dividends and interest from Russia to the abovementioned countries. Preferential rate of 5% would be retained, however, with respect to dividends and interest paid to institutional investors and public companies with at least 15% of shares in free float, subject to the minimum 15% direct shareholding requirement and the minimum 1-year holding period as well as interest paid under government bonds, corporate bonds and Eurobonds listed on a stock exchange.

Considering that combatting artificial structures created with the sole or main aim of tax optimization or tax evasion will remain one of the key objectives of the development of tax legislation and corporate practice in Russia, setting up holding structures of extra complexity would not be of particular interest.

Moreover, in 2021 Russia will start full-scope application of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (known, in international practice, as the "Multilateral Instrument" or "MLI") with 27 jurisdictions. Its application will be limited to withholding taxes in relation to Cyprus, Czech Republic, Indonesia, Kazakhstan, Korea, Portugal and Saudi Arabia until 2022. The principal purpose test (PPT) will be implemented when deciding whether DTT benefits should be granted (with a small number of countries Russia will also apply simplified limitation of benefits provision). Under the PPT, the benefits arising out of a DTT shall not be granted if the application of such benefits was one of the main objectives of any structure or transaction.

In this respect, new cross-border structures should comply with real economic substance of the project.

Under these circumstances, optimization of the project's tax burden in Russia (via optimization of expenses deductibility and effective profit tax and VAT rates, regional incentives, subsidies, etc.) may become of crucial importance.


At present, legislative framework of investment activities becomes more transparent and easier to comply with. Excessive bureaucratic formalities and procedures are progressively levied.

However, financial and tax incentives offered to the investors seem to be insufficient. Furthermore, worldwide fight against tax evasion and tax basis erosion, which became a current trend in Russia, cannot be ignored and require more sophisticated structuring of holdings and financial flows.


1. Federal Law dated 01.04.2020 No. 69-FZ "On the protection and promotion of investment", art. 7, 8

2. Federal Law dated 01.04.2020 No. 69-FZ "On the protection and promotion of investment", art. 6

3. Federal Law dated 01.04.2020 No. 69-FZ "On the protection and promotion of investment", art. 9

4. Decree of the Government of Russia dated 01.10.2020 No. 1577

5. Decree of the Government of Russia dated 03.10.2020 No. 1599

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.