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Doing business in Russia
Government support. The main incentives to attract foreign investment in Russia
In recent years, the Russian government has been actively promoting investments in certain industries with a view to greater localization, development and deployment of innovations, broader economic diversification, as well as accelerating the development of specific territories.

To do so, federal, regional and municipal authorities establish territories with a special status, execute various investment promotion and public-private partnership (PPP) agreements, offer tax benefits and subsidies, grant preferential access to public procurement and run various government-sponsored programs.

Generally, such incentives apply irrespective of whether the investments are of a domestic or foreign origin. However, most of them require the establishment of a Russian legal entity.

(a) Territories with special status

There are a number of special zones (territories) established within the territory of Russia that provide their residents with a variety of incentives. Such incentives may include tax and customs benefits, simplified procedures to hire foreign personnel, reduced administrative barriers, access to certain unique infrastructure, etc. The most noteworthy types of such territories include:

• the Skolkovo Innovation Center, a flagship government project aimed at promoting research and development activities in the fields of energy efficiency, strategic information technologies, biomedicine, and nuclear and space technologies;
• the Moscow International Medical Cluster (MIMC), a medical, scientific and educational center designed to develop advanced healthcare in Russia, MIMC welcomes world’s best clinics to open branches and engage foreign specialists;
• innovation science and technology centers (also referred to as technological valleys), such as Vorobyevi Gory (Moscow) and Sirius (Sochi;
• SEZs designed to attract investments into priority sectors of the Russian economy, there are four types of SEZs: for promotion of innovative technologies (such as Innopolis located in Tatarstan and Technopolis Moscow); industrial manufacturing (such as Alabuga in Tatarstan); ports (such as Olya in Astrakhan region); and recreational complexes (such as Gate of Baikal in Irkutsk region);
• territories with unique status (slightly different regimes as compared to SEZs) such as free port Vladivostok, special zones in Kaliningrad and Magadan regions;
• territories of advanced social and economic development (ADTs) aimed at incentivizing investment into certain (often depressed) regions, historically, ADTs were mostly located in the Russian Far East and Eastern Siberia; currently, ADTs are widely established throughout Russia, including the European part.

Aside from that, the Russian City Planning Code entitles investors to enter into an agreement with state or municipal authorities for integrated territorial development (IDT). Pursuant to such agreement, investors undertake to carry out construction and territorial development activities in exchange for simplified land use-related administrative procedures. IDT projects may involve construction of new buildings and infrastructure facilities in unbuilt areas, or renovation of old buildings and infrastructure. By way of example, the Moscow authorities initiated several such projects aiming to renovate old industrial districts.

Last update: 05.2021
Sources: Baker McKenzie
(b) Investment agreements with state and municipal authorities

Russian law allows investors to execute various types of investment agreements with federal, regional and municipal authorities. Such agreements may entitle investors to regulatory regime stabilization, tax benefits, subsidies, preferential access to public procurement and some other incentives.

SZPK

Investors may enter into SZPK with the Russian Federation, its constituent entities and municipalities to ensure regulatory stability for the implementation of major investment projects (stabilization clause),obtain additional incentives and resolve SZPK related disputes with authorities under arbitration rules.

The types of activities envisaged by SZPK projects may include construction, modernization and subsequent operation of industrial facilities, intellectual activity development and use, and environmental efficiency improvement.

SZPKs are relevant for various industries, save for certain exceptions such as gambling, tobacco, oil and gas extraction (except for LNG), retail, construction of business centers, and household and finance.

Minimum investment thresholds vary depending on the type (industry) of project:

• RUB 5 billion (approximately USD 66.7 million) — most industries;
• RUB 1.5 billion (approximately USD 20 million) — manufacturing;
• RUB 500 million (approximately USD 6.7 million) — digital economy, environment, agriculture;
• RUB 250 million (approximately USD 3.3 million) — healthcare, education, culture and sports;
• RUB 200 million (approximately USD 2.7 million) — regional projects.

SZPK participants can apply for additional state incentives such as:

• budget subsidies and low-interest loans;
• stable terms of agreements with companies applying statutorily regulated prices;
• budget grants compensating up to 50% of expenses on maintenance infrastructure, and up to 100% for auxiliary infrastructure;
• reimbursement of interest expenses on loans used to create and modernize infrastructure facilities;
• recovery of damages for large-scale projects (more than RUB 300 billion in investments) that sustain losses due to new competing projects with state participation.

SPIC

Under a SPIC, a private investor undertakes to develop and implement the production of high-tech industrial products, while the Russian federal and regional governments, as well as municipal authorities, acting jointly, assume the obligation to provide the private investor with certain benefits and incentives (e.g., a stable and preferential tax regime) to facilitate the implementation of the investment project. SPIC is concluded for a maximum term of 15 years (if the total project investment amount does not exceed RUB 50 billion (approximately USD 684 million) or 20 years (if the threshold is reached)).

SPIC legislation was significantly revised in 2019. New SPICs are commonly known as “SPIC 2.0.” The key change under the SPIC 2.0 regime is the requirement to introduce and implement modern technologies under the investment project. Modern technologies are to be used as a basis for mass production of industrial products that are globally competitive. The government approves the list of such modern technologies. Currently, several companies are negotiating their contracts under the SPIC 2.0 regime.

Prior to 2019, certain visible contracts were executed under the SPIC 1.0 regime in the pharmaceuticals, automotive, chemicals, healthcare, renewable energy equipment manufacturing and other machinery, and electronics industries.

Regional investment projects (RIPs)

Another example of investment incentives are RIPs. Participants in RIPs undertake to invest in the production of goods within a certain territory and, in turn, are granted a corporate profits tax benefits. Initially, RIPs were designed to promote investments in the economies of the Russian Far East and Eastern Siberia but investors can now implement RIPs in any region of Russia, if the respective region introduced this regime in its territory.

Priority investment projects (PIPs)

Both federal and regional authorities use the mechanism of PIPs to support certain types of projects. At the federal level, the government approved several lists of PIPs such as those in forestry and projects in the Russian Far East region. The parties of federal PIPs may be entitled to a stabilization clause in respect of tax or other payments, as well as access to public funds.

Russian regions may also award PIP status to significant investment projects, which are then included in regional PIP lists. The scope of incentives under regional PIPs depends on the regional legislation. Generally, such incentives may include regional tax benefits and subsidies.

Concessions and PPP

In order to attract private investments into public infrastructure and other areas such as IT, Russian authorities are taking significant efforts to develop PPP mechanisms.

PPP implies the cooperation of a public and private partner, based on a coalition of resources and risks sharing. The goal of the public partner is to attract the private investments to the economy, ensure availability of goods, work and services, improve their quality, as well as to develop socially critical infrastructure. A private partner gets to benefit from operating the PPP facility.

Until 2015, the only PPP mechanism available at the federal level was the concession agreement. The concession model implies that ownership title to a facility remains with the public partner. This drawback limited the possibility for implementing internationally recognized PPP models and hindered the broad expansion of concession agreements in Russia, forcing Russian regions to develop their own more sophisticated PPP legislation.

To cure this situation, on 1 January 2016, new PPP legislation entered into force establishing the general legal framework for PPP projects at the federal level and, among other things, allowing ownership title to a facility to be transferred to a private partner. This opened opportunities for private investors to employ a variety of models in structuring PPP projects that were not previously available. Nevertheless, concession agreements are still commonly used in many industries such as utilities, waste and power.

Last update: 05.2021
Sources: Baker McKenzie
(c) Regulatory sandboxes

In July 2020, Russia adopted the law on experimental legal regimes for digital innovations (regulatory sandboxes (ELR)). The law came into effect in January 2021.

ELR aims to incentivize companies to develop, test or implement “digital innovation” in fields such as:

• healthcare and pharmaceuticals, including telemedicine, technologies for collection and processing health-related data;
• transportation, including unmanned vehicles and aircraft;
• industrial manufacturing;
• agriculture;
• construction;
• financial markets;
• e-commerce;
• state and municipal services.

Companies awarded the ELR status may be exempted from certain laws and regulations (such as licensing requirements) that would have been applicable to given activities in the absence of ELR status.

Specific regulatory exemptions are established in accordance with a specific ELR program. Such programs are to be approved by the government or the Bank of Russia (in respect of financial market-related activities). The default term of ELR is three years subject to possible extension.

Last update: 05.2021
Sources: Baker McKenzie
(d) Preferential public procurement

According to some estimates, state and municipal procurement (including state corporations and alike regulated entities) in Russia accounts for about RUB 31.6 trillion (approximately USD 432 billion) or 30% of Russia’s GDP. Access to public procurement is of vital importance for many industries.

Preferences for Russian manufactured goods

Default Russian law rules restrict the public procurement of certain types of foreign goods such as various types of software, light or machinery tool and industry goods.

When both foreign and Russian goods are proposed for public procurement, a 15% price handicap applies to the goods of Russian origin.

From 2021, Russian authorities and state-controlled entities will also have to ensure a minimum share of procured goods with a Russian origin, with respect to certain types of goods, such as computer hardware.

Producers of the goods with the “made in Russia” status enjoy preferential access to public procurement. To obtain such a status, they have to demonstrate compliance with certain localization levels applicable for given goods types.

Manufacturers that are parties to SPIC may enjoy a simplified procedure to confirm the localization level.

Offset agreements

Public procurement law entitles regional authorities to execute reciprocal investment agreements (offset agreements) with investors that are Russian legal entities.

Offset agreements provide for an investor’s obligations to build or renovate certain production facilities or to set up production of certain goods (offset goods) on the territory of the region executing the agreement. In exchange for the investments, regional authorities register the investor as a sole vendor of the offset goods. Such status entitles the public buyers within the respective region to purchase the offset goods without tendering, as opposed to default public procurement procedures.

The respective investments should be no less than RUB 1 billion (approximately USD 13.7 million). The term of such agreements can be up to 10 years.

The city of Moscow executed four offset agreements for the manufacturing of medical supplies, pharmaceutical goods and some food products. The city plans to expand this practice to other fields, such as transportation, information technologies, housing and public utilities.

Last update: 05.2021
Sources: Baker McKenzie
(e) Special administrative areas (SARs)

In December 2018, SARs were established in the Kaliningrad region and Primorsky Krai of Russia.

SAR legislation introduced the concept of redomiciliation (i.e., the relocation of foreign companies to Russia). Residents of a SAR (redomicilied foreign companies) receive the status of international companies.

Conceptually, SARs aim to incentivize companies to redomicile to Russia while maintaining some of the benefits traditionally offered in offshore jurisdictions. Attention to SARs have materially grown in 2020 in view of the Russian government’s assertive renegotiation of double tax treaties with countries like Cyprus, Luxembourg, Malta and the Netherlands.

In order to apply for registration as an international company, the foreign company should meet the following requirements:

• it is a commercial corporate holding entity that carries out its activities in several states, including Russia (whether on its own account or through controlled, directly or indirectly, entities or branches/representative offices);
• it is registered in the state — member of FATF or Moneyval, currently the Russian State Duma is considering a draft law extending the list of jurisdictions qualifying for redomicilation by including countries such as those that are parties to regional international groups similar to FATF;
• its personal law and constituent document allow redomiciliation;
• it will apply to the management company of a SAR to be registered as a participant of a SAR;
• it will assume the obligation to invest in Russia at least RUB 50 million (approximately USD 680,000).

International companies enjoy tax benefits and a special currency regime.

In addition to international companies, the concept of international funds was introduced in November 2019 to provide SAR privileges to nonprofit entities. The rationale behind this change was that important sectors of the Russian economy, such as healthcare or education, are often financed through nonprofit organizations. An international fund is defined as a noncorporate organization established by participant(s) of a SAR for managerial, social and other nonprofit functions. The founder of an international fund may not be an individual, credit institution, non-credit financial institution, payment system operator or a payment infrastructure service operator.

An international fund may be registered in a SAR either by way of redomiciliation of a foreign entity or incorporation of a new entity in a SAR, and is subject to the following requirements:

• The fund (in case of redomiciliation) or the founders (in case of incorporation) will apply to the management company of a SAR to be registered as a participant of a SAR;
• The book value of the assets of the founder(s) of the international fund will be at least RUB 50 million (approximately USD 680,000);
• In case of redomiciliation, the foreign entity will be registered in the state — member of FATF or Moneyval;
• The goals of the international fund will not contradict the public order of the Russian Federation.

Last update: 05.2021
Sources: Baker McKenzie
(f) Governmental programs highlighting Russia’s strategic development goals that may be relevant for investors

In May 2018, the Russian President signed a Decree on National Goals and Strategic Objectives of Russian Development until 2024 (so-called May Decree). Pursuant to the May Decree, the government developed 13 national projects.

Each national project has its passport describing several specific federal programs that are effectively road maps to achieve specific development targets in fields such as:

• safe and high quality roads: with an original budget of RUB 4,779.7 billion (approximately USD 63 billion) providing for major construction and renovation of roads, as well as deployment of advanced road technologies;
• environment: with an original budget of RUB 4,041 billion (approximately USD 53.9 billion) providing for establishment of waste processing, recycling and utilization infrastructure, significant industrial emission reductions, implementation of best available technologies, various water and forestry related activities;
• integrated backbone infrastructure modernization and expansion: with an original budget of RUB 3,028.8 billion (approximately USD 40.3 billion) providing for major renovation, scale-up and other activities in fields such as high- speed railways, regional airports, sea ports, Northern Sea Route, inland waterways and power sector;
• digital economy: with a budget of RUB 1,837.7 billion (approximately USD 24.4 billion) providing for advanced digitalization in economic and social services, data centers and communication networks and cyber security;
• healthcare: with a budget of RUB 1,725.9 billion (approximately USD 23 billion) providing for modernization of medical facilities, special treatment of cancer, cardiovascular and other diseases, as well as set up of national medical R&D centers and smart healthcare;
• housing and urban habitat: with an original budget of RUB 1,066.2 billion (approximately USD 14.2 billion), providing for massive expansion of housing construction and various urban improvements;
• international cooperation and export: with an original budget of RUB 956.8 billion (approximately USD 12.9 billion) providing for enhancement of industrial and agricultural export;
• other more socially focused areas: demography, education, science, small and medium entrepreneurship and culture (art).

In July 2020, the president signed another Decree “On National Development Goals until 2030” aiming to reshape the national projects and to expand them until 2030. The government is now updating the national projects’ passports.

The national projects as such do not provide for specific incentives for business. However, they indicate governmental priorities that may potentially boost economic activities in the said areas. In addition to the national projects, Russian federal, regional and municipal authorities are running other numerous program that may potentially be of interest from an investment perspective.

Last update: 05.2021
Sources: Baker McKenzie
(g) Tax incentives and subsidies

Russian law permits a number of tax incentives either for specific industries, such as information technology, or types of activities (investments), such as capital expenditures or R&D.

Russian-established entities operating in some industries may apply for certain types of subsidies or grants. By way of example, the government is subsidizing:

• automakers with localized production;
• major industrials implementing so-called best available technologies (BAT) and issuing green bonds to finance BAT implementation.

Last update: 05.2021
Sources: Baker McKenzie