Review of Special Economic Zone Regime in Russia

Pros and Cons of the Special Economic Zone

In recent times the topic of import substitution became quite relevant. Let us look around our native land: maybe, Kaliningrad and Magadan can be a worthy replacement of traditional tax heavens like Cyprus and Malta?

The key principles for organization of the special¹ economic zone (hereinafter – the SEZ) are common for the countries of the Customs Union². The main privilege, which residents of the SEZ enjoy, lies in the opportunity to apply customs procedures of the free customs zone (hereinafter – the FCZ) to goods imported to the territory of the SEZ³. At application of the said procedure, goods are placed and used within the territory of the SEZ free of customs duties and levies. But these pros are complemented by material cons. Customs procedure of the FCZ applies only to those goods, which are designated for the performance by residents of business activity in accordance with the agreement on operation in the territory of the SEZ⁴. It means that only limited range of goods can be imported free of duty and VAT.

Goods may stay under the customs procedure of the free customs zone within the operation term of the SEZ, except cases when the party, which placed goods under the customs procedure of the FCZ, loses the status of resident⁵.

The operation of the customs procedure of the FCZ ends upon export of applicable goods from the territory of the SEZ or upon transfer of the right of ownership for goods to non-resident of the SEZ6. At completion of the customs procedures of the FCZ, goods placed under such procedure, and also their derivatives are placed under other customs procedures depending on the status of goods⁷. Goods produced using foreign goods shall be recognized as goods of the customs union if they comply with one of the criteria of substantial processing of goods, namely:

• The classification code of goods under the unified Commodity Classifier for foreign economic activity of the customs union has been amended at the level of any of the first 4 digits;
• The cost of goods has been amended when the percentage of cost of used materials or added value reaches fixed share in the cost of final product (the rule of ad valorem share);
• In respect of goods terms and production and technological operations required for recognition of goods made (produced) using foreign goods placed under the customs procedure of the free customs zone as the goods of the customs union has been fulfilled⁸.

The requirement to pay taxes and customs duties upon completion of the customs regime of the FCZ depends on the status of goods.

In Russia there are 4 types of the SEZ, decision on the creation whereof is made by the Government of the Russian Federation⁹:

1. Industrial and production SEZ;
2. Technological development SEZ;
3. Tourism and recreation SEZ¹⁰;
4. Port SEZ.

Kaliningrad and Magadan SEZ created under federal laws stand out among the rest¹¹.

The status of the resident of the SEZ is also attractive for its tax reliefs, to which it entitles. The precise volume of such reliefs depends on the type of the SEZ and the subject of the Russian Federation where it is located. However, the Tax Code of the Russian Federation stipulates a list of reliefs common for all types of the SEZ:

• Reduced profit tax rate payable to the budget of subjects of the Russian Federation shall not exceed 13.5%;
• Exemption of tax on property located in the territory of the SEZ created or acquired for operation under the agreement for the creation of the SEZ¹²;
• Exemption of land tax in respect of land plots located in the territory of the SEZ for 5 years from the moment of accrual of the right of ownership for the land plot¹³.

Let us further consider additional reliefs provided depending on the type of zones.

Industrial and production SEZ:

• Residents of these zones are entitled to apply accelerated depreciation defining multiplying ratio to main funds, but not exceeding 2¹⁴.

Technical development SEZ:

• Until 2018 profit tax rate payable to the federal budget shall equal 0%¹⁵;
• Reduced rates on insurance contributions payable by employers to the Pension Fund of the Russian Federation and the Social Insurance Fund of the Russian Federation are valid until 2019¹⁶.

Tourism and recreation SEZ:

• For SEZ residents unified under the decision of the Government of the Russian Federation into a cluster, profit tax rate payable to the federal budget shall equal 0%¹⁷;
• For SEZ residents unified under the decision of the Government of the Russian Federation into a cluster, reduced rates on insurance contributions payable by employers to the Pension Fund of the Russian Federation and the Social Insurance Fund of the Russian Federation are valid until 2019¹⁸.

Port SEZ:

• Exemption of VAT payment for rendering services (work performance)¹⁹.

Who can actually use reliefs waiting in the SEZ? A private entrepreneur or commercial organization, which executed agreement for the performance of business activity with SEZ authorities, is recognized as the SEZ resident²⁰. These subjects of economic activity should be registered in the territory of the SEZ; the organization should have no branches or representative offices outside such SEZ.²¹ The standard form of the agreement for residents of Russian SEZ is determined by the Ministry for Economic Development of the Russian Federation and is not subject to any revisions as a result of negotiations²².  The main liability of the resident stipulated in the agreement is investment, including capital contributions:

• For industrial and production SEZ: within the first 3 years – not less than 40 mln Rubles, during the upcoming years of the agreement term – not less than 80 mln Rubles;
• For technological development SEZ: the minimum amount is not determined;
• For tourism and recreation SEZ: the minimum amount is not determined;
• For port SEZ: within the first 3 years – not less than 40 mln Rubles, during the upcoming years of the agreement term – not less than 360 mln Rubles²³.

SEZ resident is entitled to perform only activity specified in the agreement. Failure to comply with such prohibition, and also failure to perform obligations of the investor shall be deemed a material breach of agreement terms, which constitutes the ground for its early termination.

Tax and customs control of SEZ residents is carried out following general procedures²⁴. But their situation is complicated by the fact that 2 or more material breaches of tax and (or) customs law may entail withdrawal of resident status under the court decision²⁵. A party, which lost resident status due to early termination of the agreement, shall pay penalty in the amount of 5% of the investment amount specified in the agreement, save for investments made as of the date of withdrawal of the resident status, but no more than 5 mln Rubles and not less than 150,000 Rubles²⁶.

Summarizing the foregoing, it should be noted that prior filing an application for the execution of the agreement for operation in SEZ thoroughly evaluates its pros and cons.

1. Terms special economic zone and free economic zone are synonymous and are used herein with the same meaning.
2. Agreement on Free (Special) Economic Zones in the Customs Territory of the Customs Union and Customs Procedures applied in the Free Customs Zone, executed in St. Petersburg on 18.06.2010
3. Paragraph 3 of Clause 9 of the Agreement, executed in St. Petersburg on 18.06.2010
4. Paragraph 1 of Clause 11 of the Agreement, executed in St. Petersburg on 18.06.2010
5. Clause 12 of the Agreement, executed in St. Petersburg on 18.06.2010
6. Subparagraph 3,4 of Paragraph 2 of Clause 15 of the Agreement, executed in St. Petersburg on 18.06.2010
7. Subparagraph 1 of Paragraph 2 of Clause 15 of the Agreement, executed in St. Petersburg on 18.06.2010
8. Paragraph 2 of Clause 19 of the Agreement, executed in St. Petersburg on 18.06.2010
9. Paragraph 1 of Clause 4 of Federal Law No. 116-FZ On Special Economic Zones in the Russian Federation dd. 22.07.2005
10. In accordance with Paragraph 2 of Clause 36 of Federal Law No. 116-FZ On Special Economic Zones in the Russian Federation dd. 22.07.2005 customs procedure of the FCZ is not applied in the territory of tourism and recreation SEZ.
11. Federal Law No. 16-FZ On Special Economic Zone in Kaliningrad Region and on the Introduction of Amendments to Some Laws of the Russian Federation dd. 10.01.2006
12. Paragraph 17 of Clause 381 of the Tax Code of the Russian Federation
13. Paragraph 8 of Clause 395 of the Tax Code of the Russian Federation
14. Subparagraph 3 of Paragraph 1 of Clause 259.3 of the Tax Code of the Russian Federation
15. Paragraph 1.2 of Clause 284 of the Tax Code of the Russian Federation
16. Subparagraph 5 of Paragraph 4, Paragraph 7 of Clause 33 of Federal Law No. 167-FZ On Mandatory Pension Insurance in the Russian Federation dd. 15.12.2001, Subparagraph 5 of Paragraph 1 of Clause 58, Paragraph 3 of Clause 58 of Federal Law No. 212-FZ On Insurance Contributions to the Pension Fund of the Russian Federation, Social Insurance Fund of the Russian Federation and the Federal Fund of Mandatory Medical Insurance dd. 24.07.2009
17. Paragraph 1.2 of Clause 284 of the Tax Code of the Russian Federation
18. Subparagraph 5 of Paragraph 4, Paragraph 7 of Clause 33 of Federal Law No. 167-FZ On Mandatory Pension Insurance in the Russian Federation dd. 15.12.2001, Subparagraph 5 of Paragraph 1 of Clause 58, Paragraph 3 of Clause 58 of Federal Law No. 212-FZ On Insurance Contributions to the Pension Fund of the Russian Federation, Social Insurance Fund of the Russian Federation and the Federal Fund of Mandatory Medical Insurance dd. 24.07.2009
19. Paragraph 27 of Paragraph 3 of Clause 149 of the Tax Code of the Russian Federation; complete information on tax reliefs in each SEZ is available on website of the Ministry for Economic Development of the Russian Federation: http://economy.gov.ru/minec/activity/sections/sez/preferences/taxconcession
20. Paragraph 1 of Clause 9 of Federal Law No. 116-FZ On Special Economic Zones in the Russian Federation dd. 22.07.2005
21. Paragraph 4 of Clause 10 of Federal Law No. 116-FZ On Special Economic Zones in the Russian Federation dd. 22.07.2005
22. Order of the Russian Ministry for Economic Development No. 209 On Determination of Standard Forms of Agreements for the Performance of Industrial and Production, Technological Development, Tourism and Recreation Activity and Activity in Port Special Economic Zone dd. 13.04.2012
23. Paragraph 2.5.2 of standard forms of agreements for the performance of industrial and production, technological development, tourism and recreation activity and activity in port Special Economic Zone
24. Special control regulations are specified only for SEZ in Kaliningrad and Magadan Regions
25. Paragraph 9 of Clause 11 of Federal Law No. 116-FZ On Special Economic Zones in the Russian Federation dd. 22.07.2005
26. Paragraph 5.2 of standard forms of agreements for the performance of industrial and production, technological development, tourism and recreation activity and activity in port Special Economic Zone

Yana Karausheva

Ex-Junior Lawyer

Tax and Legal Practice

Korpus Prava (Russia)