Russia: Special investment contracts as part of Russia’s industrial policy

Ekaterina Bourliand		Diana Menchik

Import substitution has started to be regarded as an important political objective in the Russian Federation. One of the key elements in achieving this has been the adoption of measures to encourage foreign industrial production to localise itself in Russia. Various measures, under active development, have been deployed to stimulate investment.

As part of implementing Federal Law No. 488-FZ, On the Industrial Policy of the Russian Federation, dated December 31 2014 (the Law), the Government of the Russian Federation has established a procedure for entering into special investment contracts (SICs), as well as providing the SIC template to be used by certain industries such as machine construction, metallurgy, chemicals, pharmaceuticals, health care, light industry, and electronics (Russian Federation Government Resolution No. 708, dated July 16 2015, (the Resolution)).

To implement the provisions of the Law and the Resolution, the Russian Ministry of Industry and Trade issued several orders concerning the procedures and templates to be followed when applying to conclude an SIC (Order No. 2288, dated August 7 2015, coming into force on October 20 2015, with the exception of certain provisions), along with the procedure for monitoring SIC implementation (Order No. 2289, dated August 7 2015, coming into force on October 23 2015).

An SIC is an agreement concluded by the investor, the Russian Ministry of Industry and Trade, or another federal executive authority (on behalf of the state) and, if the investor applies for regional or municipal support measures, the regional or municipal authorities.

Under an SIC, investors undertake to create new or modernise existing production facilities, or to develop production facilities for industrial products that have no analogues already in production in Russia. SICs may also include some commitments from the investor of a socio-economic nature (for example, creating a certain number of jobs). The state agrees to provide the investor with various supporting measures in accordance with effective legislation, and guarantees a stable tax burden for the duration of the SIC.

In particular, the financial incentives may include (subject to adoption of the relevant legislation):

• provision of subsidies from the federal Budget, the Budgets of the regions of the Russian Federation, and municipal Budgets; and

• granting of tax concessions at the federal and regional level.

The minimum investment amount for entering into an SIC is RUB750 million ($12 million).

SICs are concluded for the period of time needed for the investment project to turn an operating profit plus five years, but not for longer than 10 years in total. The moment in which the investment project turns an operating profit will be determined based on its associated business plan.

Investors are entitled to choose and specify the incentives they would like to obtain.

To enter into an SIC, the investor needs to submit a package of documents which must include, among other things, the investment project's business plan.

A special inter-departmental commission will then review the submitted documents and decide at ministerial level whether an SIC can be concluded.

The minimum period required to sign an SIC is 90-100 business days.

After concluding an SIC, the investor will have to submit special SIC implementation update reports along with supporting documents to the Ministry of Industry and Trade for each reporting period as stipulated in the SIC.

By concluding an SIC, investors will obtain guarantees of the stable tax burden for the entire term of the SIC.

Investors will also benefit from the financial incentives including tax concessions (when relevant amendments are introduced into applicable legislation).

In addition, the State Duma of the Russian Federation is currently reviewing a draft law that would grant sole supplier status to investors who have concluded SICs and produce industrial products that have no analogues already in production in Russia, allowing them to supply state and municipal purchasing bodies (as an amendment to Federal Law No. 44-FZ, dated April 5 2013, which concerns the system of contracts regarding the purchase of goods, works and services for state and municipal needs).

According to government officials, 85 applications to conclude an SIC are being processed at the moment.

Ekaterina Bourliand (ebourliand@kpmg.ru) and Diana Menchik (dmenchik@kpmg.ru)
KPMG

Tel: +7 (812) 3137334 and +7 (812) 3137300

Website: www.kpmg.ru