Russia amends laws protecting and promoting investment

A set of laws that bring important changes to legislation on the protection and promotion of investment in Russia was adopted on 1 April 2020.

The core of the amendments is Federal Law No. 69-FZ*, which supplements the existing legal framework in the area of private investment and prescribes new measures of state support in this area.

Another two newly adopted Federal Laws No. 70-FZ* and No. 71-FZ* also provide for some interrelated amendments to the Russian Tax and Budgetary Codes applicable to private investors.

The changes are expected to give new incentives to investors such as:

• the application of a stability clause for the period when investments are made; and
• subsidies for full or partial compensation of expenses incurred in relation to the creation of an infrastructure, including interest paid on loans and credits.

By providing for the incentives listed above, the state shows that it wants to enhance investment flows in the Russian economy and increase the country’s investment indicator, which is currently quite low compared to other developing countries.

Who is eligible for incentives?

To benefit from incentives, an investor has to conclude an “agreement on the protection and promotion of investment” (“SZPK”) with the state for the implementation of a new investment project in any sector of the Russian economy with the exception of:

• gambling;
• the production of excisable goods (e.g. tobacco, alcohol, oil and gas with the exception of LNG);
• wholesale and retail trade;
• the construction of administrative and business centres, shopping malls and residential buildings; and
• the activities of financial institutions supervised by the Bank of Russia (except for the issue of securities for investment project financing).

Which incentives will be available under SZPKs?

Stability clause

Investors implementing an investment project under an SZPK may be able to benefit from stability clauses (i.e. “grandfathering clauses”). These clauses will ensure that their business activities would not be in any worse position as a result of any changes in applicable laws after the relevant SZPK was concluded. Certain exceptions apply, however. And some laws will not be covered by such a clause (e.g. laws relating to national defence and state security, prevention of acts of terrorism and rectification of their consequences and prevention of other force majeure events).

In fact, this is the main incentive granted to investors under SZPKs since other support measures largely depend on the provisions of the specific SZPK to be concluded for the implementation of a particular investment project.

Each SZPK defines when the stability clause is valid. However, certain time constraints apply. Depending on the amount of capital investments, such a clause will have a term of six, 15 or 20 years, which can potentially be extended for up to six years in certain cases.

Tax incentives

Amended Article 5 of the Russian Tax Code elaborates on the abovementioned stability clause in respect of the taxation regime of the investor.

In particular, this amendment provides that the investor’s tax burden will be frozen for the entire investment period under an SZPK (i.e. it will remain at the same level as the one existing when the SZPK was concluded).

Whether a stability clause covers specific taxes depends on the decision of the competent state authorities. Maximum coverage will be granted for SZPKs concluded with authorities at the three levels. Such multilateral agreements may mention federal taxes (e.g. corporate income tax and VAT), as well as regional and local ones, including corporate property, transport and land taxes.

Subsidies

Under amendments to the Budgetary Code, an investor may be granted subsidies for compensation of its capital expenses relating to the creation of facilities for transport, energy, utility, social and digital infrastructures.

The newly adopted laws distinguish “supporting” and “ancillary” infrastructures. The first type is to be used solely for the purpose of an investment project whereas “ancillary” infrastructures can also be used for other purposes or by third parties.

The amount of subsidies for creating “supporting” infrastructure is limited to 50% of the respective expenses actually incurred. For “ancillary” infrastructures, no limit applies.

Other state support measures

SZPKs can, by law, set forth other support measures including state ones, provided that the volume of such measures does not exceed the amount of the investor’s capital investments.

How to apply for incentives?

An SZPK may be concluded following either a private or public initiative procedure.

In the first case, an investor applies to the competent state authorities to conclude an SZPK to implement a new investment project. In this case, no tender is required.

Under the second option, federal or regional authorities may announce planned investment projects by publishing declarations on their implementation and initiating tenders to select investors.

When negotiating their SZPK, the parties will link the receipt of subsidies and other state support measures to the investor’s obligations to implement the investment project under specific terms and conditions. For example, under such terms and conditions, the investor could be required to do one or all of the following:

• meet specific results or performance indicators;
• commission the infrastructure facilities to be built;
• provide free public use of the constructed infrastructure facilities;
• maintain the constructed infrastructure facilities at the investor’s cost.

Once signed, the SZPK will come into force from the date of its registration in a special register.

The process of concluding a SZPK is less complicated than that of another recently amended incentive mechanism – the special investment contract (“SPIC”). Similar to a SZPK, SPICs can provide for a stability clause and certain tax benefits to the investor.

However, the ultimate goals of these two mechanisms are different. SZPKs are mainly intended to support the development of private infrastructure projects whereas SPICs are intended to ensure the implementation of modern technologies in Russia’s industrial sectors.

What are the potential pitfalls?

Even though the amendments are aimed at protecting the legal and financial standing of investors and should be viewed positively, the following issues should be taken into consideration before concluding an SZPK:

• The amendments are limited to the provision of a stability clause and do not expressly provide for any other tax benefits or incentives to investors (e.g. reduced tax rates, tax holidays).
• In terms of taxation, the stability clause will not cover any new taxes that may be introduced to replace taxes that are similar to those payable when the SZPK was signed and are applicable to the same taxable item (even when such new taxes increase the investor’s tax burden).
• The newly adopted laws do not specify whether the stability clause will cover any legislative changes improving the investor’s position. In particular, for taxation, exceptions are only now being expressly made for positive amendments introducing or regulating incentives under corporate property, transport and land taxes. However, the clause will not cover positive changes for those taxes representing the main burden of taxpayers (e.g. VAT and corporate income tax).
• The liability of the public party or parties to a SZPK is generally limited to compensation for actual damage incurred by an investor.

Other issues to consider

Since the newly enacted amendments give an extensive list of regulations to be adopted at federal, regional and local levels (e.g. the rules for concluding SZPKs, a SZPK template, the rules for maintaining the SZPK register), it is not clear yet how the changes listed above will be implemented in practice.

A dedicated state information system – to be launched on 2 April 2021 at the earliest – will also be used to conclude SZPKs.

We therefore recommend closely monitoring developments in this field.

Once all the required regulations are adopted and in force, SZPKs should be of interest to companies investing in large infrastructure projects. In some cases, they could even become an alternative to concession and private-public partnership agreements.

If you have any questions on this eAlert, do not hesitate to contact CMS Russia experts Hayk Safaryan, Artashes Oganov, Igor Ershov, Dmitry Bogdanov or your regular contact at CMS Russia.

* In Russian