Foreign Investment Into Russia’s Special Economic Zones
Investments into Russian SEZ have reached US$4 billion with 19 national SEZ and another 6 coming online, each offering numerous tax and operational benefits for foreign investors
Knight Frank, the international real estate consultancy, has issued data showing that the total investment volume in Russia’s Special Economic Zones (SEZ) over the past decade amounted to 304.6 billion rubles. (US$4.14 billion).
SEZ are industrial and manufacturing parks, often located near strategic infrastructure such as ports and rail connections, and offer incentives for businesses, including foreign investors, to establish operations. These come in the following guises:
- No Duty On Imported Goods Into The SEZ
- This allows the processing of imported component parts into the SEZ without having the immediate burden of incurring import duties or VAT. This allows a window to incorporate such items into a finished product which may incorporate other imported and Russian domestic items. An example could be in the shoe manufacturing industry, with rubber soles imported from Vietnam, canvas uppers from Armenia, leather from India, and metal components from Russia. These can then be manufactured into the finished item and either be sold onto the Russian market (when VAT and import duty on the component parts applies) or reexported to other markets. This tax burden delay helps with the production cash flow overheads.
- Profits Tax And Other Tax Incentives
- These vary from SEZ to SEZ, however in Russian SEZs it is normal for businesses within SEZs to have a Profits tax rate of 2-5% (as opposed to the national 20% rate) for a period of typically 5 years although in certain industries it can be longer. This is obviously advantageous and helps businesses lower their tax burden and improve their available cash for further expansion and development. Tax reductions may also apply for VAT in addition to local taxes on property and land use rights and so on. Some SEZ offer lower individual income taxes to encourage the employment of personnel.
- Lower Utilities Rates
- Some SEZ also offer lower than normal business operating costs such as cheaper electricity and water use rates.
According to Knight Frank, the four most popular SEZ in Russia are as follows:
Alabuga SEZ, Yelabaluga
The Alabuga SEZ is in Tatarstan and specializes in industrial and production services, in a 20 km² area in the Kama Innovative Territorial Production Cluster. It is one of the most successful SEZ in Russia, with varying reductions for profits taxes in addition to zero rated land and property taxes and discounts on social insurances. It handles automotive works, including cars as well as industrial vehicles such as tractors and other agricultural machinery. The SEZ is connected to the main M7 auto highway as well as the Unified Deep Water Russian Rive network and the regional rail network, giving market access to much of Central and Southern Russia. It is featured on Wikipedia here while the Alabuga SEZ website is here.
Samara Togliatti SEZ
Samara Togliatti SEZ is the gateway to the Volga region of Russia and is connected by road, rail and navigable river to Russia’s heartland and most major cities. The SEZ specializes in mechanical engineering for aerospace, automotive and other machinery, food processing and light industrial products. It offers 2% profits tax rates, zero land and property taxes, reductions in social insurance and duty-free imports. The Samara Togliatti SEZ details arehere.
Astrakhan Lotus SEZ
The Astrakhan Lotus SEZ is based on the Caspian Sea and is connected to the Eurasian Land Bridge and ports from Kazakhstan such as Aktau.This means it is part of the Belt & Road Initiative with connections via multi-modal maritime and rail through to China, and via the INSTC to Iran, the Middle East and India. The Lotus SEZ provides oil and gas processing, other chemical and raw materials processing facilities, shipbuilding, and other engineering facilities. It provides 2% Profits tax rates for the initial ten years, reduced social insurance, zero land and property taxes and import free tariffs. Several Caspian countries have logistics offices in the Lots SEZ assisting onward planning for exported products. The Astrakhan Lotus SEZ overview is here.
Kaluga is 150km south-west of Moscow and an important center of the Russian automotive industry, with several foreign companies opening assembly plants in the SEZ, including Volvo and Peugeot. Both cars and trucks are produced here both for the Russian and Eastern European markets. The SEZ provides significant profits tax incentives in addition to discounts on VAT and duty-free items, as well as discounts on property and land taxes. It is well connected to Moscow by rail and road. Details of the Kaluga SEZ can be found here.
In total, more than 20,000 thousand jobs have been created in Russian SEZ; this is now increasing at a rate of 1,900 jobs, or nearly 10% per annum. In total, there are 19 SEZ in Russia, with the Alabuga SEZ being the first to open its doors in 2005. During 2020, a further six SEZ have been registered, and are currently undergoing construction, the fastest developments for SEZ in Russia’s history.
The largest number of Russian SEZ are in the Moscow region, with two of the most popular being:
Moscow Stupino Quadrat SEZ
The Moscow Stupino Quadrat SEZ covers over 1000 ha of industrial land and specializes in industrial and technological developments across a wide range of industries. The SEZ offers income tax reductions to 2% for the first eight years of operations, in addition to many other discounts against property, land and other taxes. The SEZ includes a bonded zone and the usual duty allowances on VAT and import-export. The Moscow Stupino Quadrat SEZ details can be found here.
Moscow Technopolis SEZ
This SEZ is sited in the Zelenograd area of Moscow, covers 207 ha, and handles investments into hi-tech industries, including micro-electronics, biotech, robotics, medical devises, and energy efficiency. It provides 2% profits tax for ten years, zero land and property taxes, discounts on social insurance and zero import duties. The Moscow Technopolis details are here.
A peculiarity of the Moscow SEZs is that all are private and created without state participation. This makes it easier to acquire a land plot without the need to obtain the status of a SEZ resident.
Investing into Russian SEZs will be of particular importance to Asian investors from Singapore and Vietnam, as these countries have Free Trade Agreements with Russia via the Eurasian Economic Union (EAEU). Several other ASEAN members including the manufacturing tigers of Indonesia and Thailand are currently negotiating FTA with the EAEU, as are India and China.
Foreign investors interested in examining the different options for investing or setting up in Russia’s SEZs may contact Maria Kotova at firstname.lastname@example.org
Russia Briefing is written by Dezan Shira & Associates. The firm has 28 offices throughout Eurasia, including China, Russia, India, and the ASEAN nations, assisting foreign investors into the Eurasian region. Please contact Maria Kotova at email@example.com for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.