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State support measures aid investment projects in Russia

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State support measures will be extremely valuable for investors

Nina Goulis and Arpik Aydinyan of KPMG describe the state support measures for investment projects providing substantial opportunities for Russian and foreign investors.

There are currently a number of state support measures available to aid the implementation of investment projects in Russia, providing both tax and non-tax business incentives. Among these, the investment protection and promotion agreements (IPPA) and special investment contracts (SPIC) are emerging as most popular.

The key objective of the IPPA is to guarantee for investors stable legal regulations throughout the entire period in which an investment project is to be implemented. 

IPPAs can be initiated by public-law entities (the Russian Federation, its regions or municipalities) through a tender, or by private entities (which can only be Russian companies). Investors can be both Russian and foreign entities. 

Depending on the investment amount, IPPAs can be concluded for anywhere between six and 20 years: six years for investments of up to RUB5 billion (approximately $68 million); 15 years for investments of up to RUB10 billion; and 20 years for investments of more than RUB10 billion.  All the while, the minimum investment amount requirements have been set. For example, for the IPPAs with the Russian Federation`s region (Russian Federation itself not being party to such agreements) the requirements for minimum investment amount are at least RUB200 million.

Depending on the investment amount, the specific nature of the investment project, or the public stakeholder (Russian Federation, its regions, municipalities), investment projects concerned will not be subject to increased export customs duties, environmental impact payments, environmental levies or those changing land and urban development regulations, among other laws.

In addition, there will be other measures to stabilise taxes, meaning that while the project is being implemented, profits, property, transport and land tax rates will not be raised. Neither will the terms of VAT payments and refunds change, nor will new taxes and duties be applied.

Thus, all laws effective at the date of inception of an investment project will be preserved for the entire term of that project’s implementation; any later acts which compromise the investor’s position will not apply to the investor.

In addition to stabilising the legal environment, the investor can also expect reimbursement of costs to create or upgrade amenities and support infrastructure necessary for implementation of the investment project from the government.

IPPAs may be concluded to create or reconstruct (upgrade) facilities in the chemicals, metals, automotive, or forestry industries, or for various agricultural sites. IPPAs may not be concluded for tobacco, liquor, gambling, oil and natural gas (other than LNG) production, among other exceptions.

According to official records at the time of writing (September 2021), about 36 IPPAs have been concluded, worth RUB1.2 trillion. Among other areas, they cover projects in the chemicals, transport, and power industries, as well as the extraction and processing of minerals, timber processing, agriculture, and health sectors. 

Special investment contracts (SPIC) are another measure to support investors. The SPIC develops and implements the latest processes to enable the production of industrial products that can compete with the best on the world market. 

The SPIC is concluded between the investor and the state (the Russian Federation, its regions, its municipalities). Investors can be both Russian and foreign entities. The SPIC is concluded either for 15 years if the investment amounts to RUB50 billion, or for 20 years if the investment is more than RUB 50 billion. There are no provisions regarding the minimum investment amount; however, the investment amount will govern the term of the SPIC. The SPIC is concluded in a competitive process.

The SPIC provides to investors during the term of the contract the following support measures from the state:

  • No increase in tax rates and/or cancellation of reduced tax rates, tax exemptions, or changes in the conditions for the granting thereof;

  • Profits tax exemptions (reducing the profits tax rate to 0%), property, transport and land tax concessions, if provided for at the regional level;

  • A simplified procedure for obtaining grants to compensate for some of expenses, e.g. in agricultural machinery production;

  • The leasing out of land without a tender, along with other support measures; and

  • An expedited and simplified procedure for being awarded “Made in Russia” status for products.

SPICs can be concluded in sectors under the authority of the Ministry of Industry and Trade, Ministry of Agriculture and Ministry of Energy of the Russian Federation. Among other industries, SPICs can aid investments in the automotive, metals, chemicals, consumer, timber, electronics, pharmaceuticals, and construction materials sectors.

According to official records at the time of writing (September 2021), around 47 SPICs have been concluded, with investments worth more than RUB880 billion. 

These state support measures listed above have substantially improved the investment climate in Russia and offer considerable opportunities to both Russian and foreign investors. They also provide long-term guarantees for those implementing investment projects. 

Selection of an IPPA or SPIC depends on quite a number of parameters, such as the objectives of the investment project, the amount of the investment, the industry, etc. In practical terms, these two investment instruments may be combined, and by doing so investors will be able to get the most from the opportunities and guarantees obtained.

These guarantees and opportunities in the IPPAs and SPICs enable investors to have certainty that the laws underlying the target indicators and business model of the project will be stable for the entire period of project implementation. 

We recommend that investors pre-analyse which of the options (or which combination thereof) best suit their aims and take into account factors such as the amount of the investment, the project delivery time, project specifics and the region of Russia in which the project is being implemented. 

Utilisation of these measures provided by the state is a proven way to increase effectiveness, which is extremely valuable for investors.  

 

Nina Goulis

Partner, KPMG 

E: ngoulis@kpmg.ru

 

Arpik Aydinyan

Manager, KPMG

E: aaydinyan@kpmg.ru

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