Russia To Pass Investment Incentive Laws On Free Economic Zones In New Annexed Regions

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Includes zero percent corporate income tax for first ten years of operations

Russia’s State Duma has approved draft laws on the creation of Free Economic Zones (FEZ) in the Donetsk, Luhansk, Kherson and Zaporozhye regions of Russia, which were annexed in September 2022. These are designed to attract corporate investment into the regions, stimulate productivity and boost employment.

The regions had been largely neglected by Kiev in the past as punishment for their pro-Russian views. Most of the inhabitants are ethnic Russians, with many having suffered from military conflict from Ukraine since 2014 – an issue the EU has tended to ignore.
Investment incentives are available for those businesses wishing to participate in these FEZ’s, including:

  • Reduced rates of insurance premiums to 7.6%;
  • Zero corporate income tax rates on profits received from the implementation of an investment project;
  • Exemption from paying corporate property taxes

These benefits are valid for ten years from the date of incorporation. Also, there will zero land tax payable for land plots in the FEZ’s for three years from the initial registration.

Businesses wishing to participate in these FEZs must either have a local region business licence or have a branch operation, a requirement likely to spur the establishment of new Russian Corporate Branch offices in these regions. There are also defined levels of required investment – with FEZ registered capital for corporate businesses amounting to ₽30 million, (US$360,000), for SMEs at ₽3million (US$36,000) and for IT companies, ₽1 million (US$12,000).

The investment laws are being prioritized and will come into immediate effect upon their publication, expected within the coming weeks. They show that Moscow is already providing reconstruction and investment capital into the areas previously part of Ukraine, yet subject to intense harassment from Kiev.

Utilities, banks and communications in these regions have all been connected to the respective Russian national networks. Each of these regions promoted their economic benefits at their regional investment stands at last week’s SPIEF 2023 event.

Donetsk People’s Republic

Population: 2.5 million
Principal Industries: Mining, heavy industry

The Donetsk Republic declared independence from Ukraine in May 2014, although only a small number of countries, including Russia, recognized this. Ukraine and the West have never accepted this status. The region is industrial and known for its coal mining industry, hence the black band in the Republic flag. About 4 million people live in the region.

Luhansk People’s Republic

Population: 2.5 million
Principal Industries: Metallurgy, machinery, agriculture

The Luhansk region declared independence from Ukraine in May 2014. It has a population of just under 3 million, with the capital city also known as Luhansk. Luhansk is known for its metallurgy, machinery, and agricultural industries.

Kherson Oblast

Population: 250,000
Principal Industries: Regional economic hub, shipbuilding, major port

Kherson Oblast (Province) declared itself part of Russia following referendums carried out in September 2022. These have not been recognised by the EU or United Nations. The capital city is currently Henichesk after the traditional capital, also named Kherson, was deemed too dangerous to administer the region. Kherson Oblast has been greatly affected by the ebbs and flows of the current conflict and its complete territorial status has been subject to change.

Zaporozhye Oblast

Population: 710,000
Principal Industries: steel, aluminium, aircraft engines, automobiles, transformers for substations, and other heavy industrial goods.

Zaporozhye Oblast declared itself part of Russia following referendums carried out in September 2022. According to local officials, 93.11% of voters in favour of joining the Russian Federation. This had followed years of conflict with Ukrainian forces dating back to 2014. This referendum has not been recognised as valid by the EU or United Nations. The current capital city is Melitopol, moved after the traditional capital, Zaporizhzhia, has been subject to intense Ukrainian bombing. It is the site of the Zaporizhzhia Nuclear Power Plant (ZNPP), which has also been subject to shelling and is the largest in Europe.

The Russian Ministry of Construction believes that the creation of these FEZs will allow “sustainable socio-economic development of new territories.” It is planned that the new zones will operate until the end of 2050. For comparison, the term of operation of FEZs in Crimea and Sevastopol are until the end of 2039.

Source: RBC with additional regional intelligence by Chris Devonshire-Ellis

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