Companies Investing In Russian Arctic To Receive Tax Incentive Benefits
The Russian Corporation for the Development of the Far East will accept applications from investors who wish to receive Arctic residency status, from August 28, the Russian Ministry for Development of the Far East and Arctic said on Monday.
This follows on from laws, signed off by President Vladimir Putin earlier this year and drafted by the Ministry, that provide incentives for investors, planning new projects in the Russian Arctic zone. This status may be granted to businesses planning projects with investments of at least 1 million rubles ($14,000).
What is the Arctic Investment Project?
This investment project is aimed at building transport, utility, social, innovation and other types of infrastructure in the Russian Arctic zone. It should meet all of the requirements below:
- Infrastructure in the Russian Arctic zone may be operated only by Russian entities whose main activity is mining in the Russian Arctic zone (“OpCo”);
- Infrastructure in the Russian Arctic zone may be transferred by a participant in the Arctic investment project to the OpCo without consideration;
- The OpCo and the participant in the Arctic investment project are treated as mutually related parties under Art. 105.1 of the Russian Tax Code;
- The aggregate amount invested by a participant of the investment project into building infrastructure in the Russian Arctic zone may not exceed RUB100 billion;
- Each Arctic investment project is carried out by one participant in the Arctic investment project.
How To Obtain Arctic Tax Residency?
Arctic tax residency will be granted to Russian legal entities if they meet the following criteria during the effective period of the treaty on investment in the Russian Arctic zone:
- The entity is officially registered in the Russian Arctic zone;
- The entity has no subdivisions outside of the Russian Arctic zone;
- The entity does not apply special tax regimes under the Russian Tax Code;
- The entity is not a non-profit entity, bank, insurance company, non-state pension fund, professional securities market participant or clearing organisation;
- The entity is not a resident of any special economic zone, territories of advanced social and economic development or the Free Port of Vladivostok, nor a participant in regional investment projects.
The following tax rates are proposed for residents of the Russian Arctic zone:
- 0% for federal tax and 7% for regional income tax activities carried under an agreement on investments in the Russian Arctic zone (excluding hydrocarbon producers operating in the new offshore fields in the Russian Arctic zone);
- 3% on the tax base determined by hydrocarbon producers operating in the new offshore fields in the Russian Arctic zone, provided that they abide by an agreement on investment in the Russian Arctic zone. A resident of the Russian Arctic zone can choose to apply lower tax rates:
- To the entire tax base, if income from its activities under an agreement on investment in the Russian Arctic zone constitute at least 90% of all taxable income (net of FOREX gain); or
- Only to the tax base arising from the fulfillment of an agreement on investment in the Russian Arctic zone. The selected method must be recorded in the tax accounting policies and be consistently observed over the entire term of the project agreement. It would also require accounting for income and expenses resulting from activities in the Russian Arctic zone separately from income (expenses) resulting from other activities. Lower tax rates will apply starting from the quarter in which the resident of the Russian Arctic zone received Arctic residency status until the quarter in which the taxpayer lost such status.
Property Tax Benefits
Property in the Russian Arctic zone created or acquired under an agreement on investments in the Russian Arctic zone would be tax exempt from the registration date of such property until the termination date of respective agreement.
Land Tax Benefits
Land in the Russian Arctic zone utilized under an agreement on investments in the Russian Arctic zone would be exempt from land tax. The exemption would be effective during the entire validity period of the agreement, from the first day of the month following the month in which the entity became a resident of the Russian Arctic zone.
Insurance Contribution Benefits
For residents of the Russian Arctic zone, the tariff on insurance contributions for mandatory pension insurance is 6%. For mandatory social insurance for temporary incapacity or maternity, the tariff is 1.5%, while for mandatory medical insurance, it is 0.1%. Lower rates are applied from the first day of the month following the month in which the entity became a resident of the Russian Arctic zone, and cease to apply on the first day of the month following the month in which it lost residency status.
The Russian Arctic Investment Project tax regime appears attractive, and lowers the overall tax burden in Russian and increases investment appeal. It will boost business activity in the Arctic region and ought to be taken into consideration by foreign investors classed as Russian domiciled subsidiaries. Businesses involved in operations suitable for Arctic operations should consider the status of Arctic Zone residency.
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