Russia to Create Tax Free Zone on Border with EU

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klgdRussian Prime Minister Dmitry Medvedev has confirmed plans to create a special administrative tax free zone in Kaliningrad. Speaking at the International Legal Forum plenary session at the Saint Petersburg International Economic Forum last week, he stated: “We are planning to create a special legal status and special tax regimes in the Kaliningrad region; this status will be available on the Oktyabrsk Island soon”.

Kaliningrad has been hit hard by EU sanctions upon Russia. Several EU funded manufacturing facilities have had to close over the past few years. However, its strategic position on the Baltic sea, yet surrounded by EU nations of Lithuania and Poland, has made it potentially a boom-town for Russia-EU trade. In light of the continuing sanctions, however, the tax free positioning of Kaliningrad will alter from the previous policy of attracting foreign investors from the EU to offering a safe return home for Russian money and investments currently held overseas and especially in London.

kaliningrad

According to Medvedev, the best practices of advanced legal regulations were tested in experimental zones and have the potential to come into effect for the Russian economy as a whole. It is estimated that Russian businessmen keep nearly US$50 billion in British offshore zones. The population of Kaliningrad is just under 500,000, and considerable investment has previously been made to position itself as a Russian financial and trade hub. It is also hosting some of the 2018 World Cup Soccer finals, with England playing Belgium there on June 19th.

“Russia’s experiment with turning Kaliningrad into a tax haven for Russian businesses dealing internationally is an interesting one”, says Chris Devonshire-Ellis of Dezan Shira & Associates. “It fits with the new state policy of adapting new mechanisms to lessen reliance on external financing. A lot will depend upon how safe and secure Russian businessmen with financial assets currently parked outside Russia will feel about both the incentives and guarantees given in Kaliningrad. It will also be interesting to note whether the legislation will allow foreign-owned Russian companies to take advantage of the facility. We may expect a zero rate of tax to be applied on profits generated externally from Russia, in addition to tax incentives being available for the further re-investment of these funds into Russia”.

Plans are also in place to connect Kaliningrad with the Baltic states to the east and to Berlin further west via rail. The route would have a terminus at St. Petersburg, passing through Latvia, Lithuania and Kaliningrad before routing through Poland and onto Berlin.

Kaliningrad was previously known as Konigsberg and was the capital city of Prussia up until World War Two, following which it was annexed as a Russian enclave and became part of the Soviet Union, and then the Russian Federal Republic. It is a port city and home to part of Russia’s Baltic Fleet. Kaliningrad’s major industries are manufacturing, shipping, fishing, and amber products, and it maintains strategic importance especially within the auto industry.

Kaliningrad – Fast Facts
Size: 223 sq km
Population: 450,000
GDP per capita: Int.$14,136 (equivalent to Malaysia)

 

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Russia Briefing is produced by Dezan Shira & Associates. The practice provides foreign investors in Asia with research, legal and tax advisory services and maintains offices throughout Asia as well as in Russia. For assistance please contact the firm at russia@dezshira.com or visit us at www.dezshira.com

 

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