Special Economic Zones in Russia
What Are They?
Before talking about Special Economic Zones, let’s establish what «not special» is. Russian Tax Code provides for a number of taxation systems applicable to different kinds of businesses all across the spectrum, from the smallest individual entrepreneurs to the biggest Russian state corporations.
Photo credit above: Towers of the Technopark Akademgorodok, Novosibirsk, Russia
Uploaded to iStock by river34 Feb 2020 Stock photo ID: 1203979661
The most common systems are Base system and Simplified system that comes in two subsystems. Base system sets a tax rate on company profits at 20%, there are a lot of provisions on what can and what can not be deducted as costs for the taxation base, also there are different modifications to the rate that can be made in specific scenarios, but for the purpose of this article let’s just accept 20% as a normal rate of profit tax in Russian Federation.
Simplified system taxes either revenue or profits (earnings). For the revenue subsystem the standard rate is 6%. For the profits subsystem the standard rate is 15%.
Other significant tax in Russia is VAT (value-added tax) - 20%, users of the simplified taxation system do not apply outgoing VAT and therefore don’t pay it, which is very impactful for some types of businesses.
More taxes worth mentioning here, although not nearly as impactful, would be: land tax - 1.5%; property tax - 2.2% and transport tax - from 10 to 150 rubles per horse power for reference, but the actual taxation system is determined by the regional government. There are also import fees, determined by the Federal Government.
Special Economic Zones were first established by Federal Government in 2005 to stimulate business activity in some regions and also with the goal of development of some prioritized industries.
Special Economic Zones in Russian Federation are regulated by Federal Law from 22.07.2005 #116. There are also Government requirements for investment projects specified in Government Decree from 14.02.2024 #156. SEZ are created by regional governments in accordance to the law.
There are a total of about 60 Special Economic Zones in Russia, the number varies from year to year. On the map there are Russian regions that contain any type of SEZ in 2024.
Some of those SEZ’s coincide with Free Customs Zones. So in addition to tax preferences, special terms for loans and rent, resident companies can also import materials from abroad without paying any fees.
Most SEZ stipulate requirements for investment and contributions into local economy. SEZ are created for achieving the following goals: - development of manufacturing industries. - development of high-tech industries. - development of tourism and the health resort industry. - development of port and transport infrastructure. - development of technologies and the commercialization of their results. - production of new types of products.
SEZ can also be closed for various reasons:
• This is necessary to protect the lives and health of people, protect nature and cultural values, to ensure the defense of the country and the security of the state.
• For three years since its creation, not a single agreement has been concluded with companies willing to develop business there.
• For three years in a row, its residents have not been engaged in core activities.
• For five years in a row, the functioning of the SEZ has been recognized as ineffective.
If the SEZ is closed or the company has lost it’s resident status, it can continue to work under a common law of Russian Federation without preferences or stipulations imposed under SEZ. There are four types of SEZ in Russia, the most prominent one is an Industrial type, others are Technology Development, Port and Tourist. Industrial and Port zones stipulate minimal volume of investment - 120 million rubles. IT companies work in Technology Development zones.
There are also SEZ’s that don’t belong to any type and are regulated by separate laws. Kaliningrad region SEZ is based purely on investment, for example IT companies have to invest 1 million rubles in a span of 3 years, other companies - from 10 to 150 million. Other SEZ’s can be narrowly specialized, for example home appliances production SEZ in Lipetsk.
All zones are different, so specific needs of the business have to be considered and outlined before choosing which zone will be the most suitable. There’s also a factor of responsiveness of the local SEZ authorities and regional government, which can vary.
Benefits and preferences vary from zone to zone, most common are 0% on property and land taxes, also 0-15.5% on profits tax as opposed to standard 20%. For simplified taxation system users standard rates can be halved.
Huge benefits in many SEZ’s are also to be had in the form of good infrastructure for building a factory or renting property, spaces and equipment. In well developed zones there can be a lot of synergy with other residents. Most zones also provide lowered rates for renting land and buildings, cheap amenities, power connections, as well as all types of services like transportation, imports, accounting, HR and education.
By the results of 2023 the best of industrial zones was Alabuga (Tatarstan), the best of technological zones was Technopolis (Moscow).
Foreign individuals generally can create and own any amount of shares of Russian companies, although there can be limitations for some specific industries or circumstances. To register as an Individual Entrepreneur one has to posses any type of residency permit.
Of course foreign investors also have to consider that dividends are taxable in Russia. The rate is 15% in most cases, but there are cases to have it at 0%. Which is not the focus of this particular article.
In addition to Special Economic Zones Russian government has also established territories with preferential economic regimes in a form of Territories of Forward Social-Economic Development, which also provide for all kinds of special taxation and investment preferences. Most of those territories are situated in the Far Eastern regions of Russia. Territories of Forward Social-Economic Development are not a focus of this publication (but will be covered in a follow-up article).
Special Economic Zones are a great tool in an arsenal of anyone who wants to do business in Russia, so the effort of researching their peculiarities should definitely be made. Especially if the business one plans is aligned with the needs of particular region containing one of those zones.
Links
Official SEZ portal: https://оэз.рф/
Federal Law from 22.07.2005 #116
https://www.consultant.ru/document/cons_doc_LAW_54599/
Government Decree from 14.02.2024 #156 https://www.consultant.ru/document/cons_doc_LAW_469958/
Published October 7, 2024
Novosibirsk, Russia
Aleksey (Alex) Mashkin PhD, MBA, former CEO of industrial and medical companies, investment and business development consultant. Located in the third biggest city in Russia, industrial and scientific center of Western Siberia — Novosibirsk.
E-mail: alex021202@bk.ru