Russia To Create A New Free Trade Zone In Karelia, Bordering Finland And The European Union

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Russia’s Ministry for the Development of the Far East and Arctic will support Karelia’s initiative to organize a free customs zone in the region’s Arctic districts. It will be a major benefit for potential Arctic investors, working with foreign equipment, according to the Arctic regional Deputy Minister Alexander Krutikov, who stated “The free trade customs zone option will be favorable for companies which require imported equipment.”

Karelia has a 1,340 long border with the European Union and significant relations with neighboring Finland, making this incentive important for boosting bilateral trade with Finland, Norway and Sweden, and for Russian businesses investing in the Arctic to import European equipment.

“A free customs zone could make the process to equip and open our data center easier and quicker, as most of the equipment is imported. Thus, it will not be used elsewhere, only in this territory,” KU Data Center’s representative Alexei Korolev said. The data center is being built in the Segezhsky District, including at Rusal’s nearby aluminum plant in Nadvoitsy. The data center, which will employ 120 people, will be operational before the end of 2020. The location is ideal due to the cool temperatures. The current investments are 520 million rubles (US$6.8 million), and further investments in infrastructure would add another 4 billion rubles (US$52 million).

“We want our company to become a resident of the Arctic zone in terms of structure and potential,” he continued. “We have been a resident of Nadvoitsy, however the combination of incentives offered for Arctic residents is very attractive. The status is interesting and promising.”

Russian Arctic Investment Tax Incentives

Businesses have been filing documents to obtain Arctic resident status. Just six weeks since the law on business incentives in the Arctic came into force, the Arctic Ministry for Development has been processing 130 applications.

Karelia has also adopted a set of regional incentives for the Arctic residents, with one approved, three about to be and work continuing on another 20 potential Arctic investment projects.

Among the regional support measures in the Arctic zone are the abolishment of the regional component of the income tax and the property tax for five years. Before the year end, all municipalities, that are included in the special economic zone, will introduce special land tax benefits.

Residents and businesses who pay taxes on revenues, enjoy special income tax rates of 1% instead of 6% for the first five years, and 3% instead of 6% for another five years. Businesses paying taxes on revenues minus expenses, instead of the standard 12.5% profits tax will pay 5% for the initial five years of operations and 7% for another five years.

These incentives have arisen because earlier this year, President Vladimir Putin signed a package of laws on business incentives in the Arctic. The Russian Arctic became the biggest economic zone in Russia and in the world with an area of almost 5 million square kilometers. Arctic residents will enjoy a free customs zone procedure, certain tax benefits and eased administrative procedures.

The Russian side is mostly Russian-speaking. However, there are minorities speaking Finnish or Karelian especially in the Republic of Karelia and in the Karelian villages of the Tver region of Northwest Russia. Karelia is a regular destination among Finnish and Russian tourists for its unique architectural, cultural and historical sites.

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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 russia@dezshira.com for Russian investment advisory or assistance with market intelligence, legal, tax and compliance issues throughout Asia.

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