Investment attractiveness of Russian regions: tax aspects

December 2013

International Forum on development of cooperation and organization of industrial suppliers business in Introduction to Russia

Country Snapshot

Capital: Russia by regions Area: 17,098,200 sq km

Population (2013): 143.4 million

Cities over 1 mln: 15

President: Vladimir Putin Prime-minister: Currency: Ruble (RUB)

GDP in PPP (2012): USD 3.380 billion

Real GDP Growth (2012): +3.4%

GDP per capita (2012): USD 14,061.5

Number of regions 83

FDI (2012): USD 51.4 billion Darker shade indicates higher level of direct foreign Inflation (2012): 6.6 percent investments in the region*

Foreign Reserves *according to the joint study by KPMG and RSPP “Taking the investor perspective: looking at USD 513,772 billion (01.07.2013): the regional investment climate through the eyes of foreign businesses”, 2013

© 2013 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms 1 affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Key regional investments factors

■ Availability of main customers

■ Locations of many automotive components suppliers/producers correspond with locations of manufactures ■ Supply chain optimization: ■ main suppliers ■ Infrastructure, geographic location (sea ports, railroads, highways, airports in the region) ■ Quality and quantity of workforce ■ Natural resources ■ Support from regional authorities ■ Effective communication channels between businesses and local authorities ■ Preferential terms of land use ■ Connection to engineering infrastructure ■ Subsidies ■ Investment tax concessions

In 2013 KPMG and RSPP (The Russian Union of Industrialists and Entrepreneurs) published a joint study “Taking the investor perspective: looking at the regional investment climate through the eyes of foreign businesses”. The Study is available: http://www.kpmg.com/ru/en/issuesandinsights/articlespublications/Pages/taking-the-investor-perspective.aspx http://www.kpmg.com/ru/ru/issuesandinsights/articlespublications/Pages/taking-the-investor-perspective.aspx

© 2013 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms 2 affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Locations of car/ manufacturers

Saint-Petersburg, Nizhniy Novgorod Leningrad region region Hyundai/Kia GAZ Group , Ford Volkswagen Group Mercedes-Benz (JV with MAN, Scania, Toyota GAZ Group) E-avto, Yarovit Motors Kaliningrad Autotor (assembly of GM, Kia, BMW )

Moscow Izhevsk ZIL (in future – IzAvto (Autovaz assembly of Fiat Group) cars) Autoframos (Renault) Sollers Group (UAZ) ISUZU (JV with Sollers)

Kaluga region Volkswagen Group Tatarstan Peugeot-Citroen- Samara region Mitsubishi (JV) Taganrog republic GM-Autovaz Primorsk region Renault Trucks Tagaz Ford-Sollers Autovaz/Renault- Sollers (assembly of Volvo Nissan Group SsangYong cars) Toyota (JV Mitsui & Cherkessk Miass Co - Sollers), Derways (JV with Sollers), GAZ Group

© 2013 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms 3 affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Locations of suppliers of automotive components (some examples)

Saint-Petersburg, Nizhniy Novgorod Leningrad region Daido Metal Lear, Valeo Faurecia, JCI, Magna Ficosa International Toyota Boshoku, Toyota Tsusho, In general, locations of many Magna, Asahi Glass, Nokian Tyres automotive components T.RAD Gestamp, Bosal (JV with GAZ suppliers/producers Tenneco Automotive Group) correspond with locations of Asahi Glass, Stadko Yura Corporation, car/trucks manufactures Hyundai Mobis, Dinex

Moscow/ Moscow region Tatarstan republic IHI, BASF Sollers Group, Lear, Michelin, Valeo Automotive Glass Cummins, Leoni Magna, Autocomponent Stadco, Sigit Weigl, Rototech Kaluga Benteler, Bosal Faurecia, Lipetsk Continental Yokohama Samara / Togliatti CIE Automotive Deplhi Corporation Gestamp Faurecia, ZIT Magna, Visteon Johnson Controls Sitech Magna, Valeo, Akom, Tenneco Automotive Gestamp, Eberspaecher

© 2013 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms 4 affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Tax concessions (1/6) General overview

Tax concessions

Federal level Regional level

Special Economic Zones Tax concessions stipulated for residents of Tax concessions stipulated by the Federal Investment tax techno parks located in stipulated by the Russian Law 116-FZ concessions stipulated by the regions Tax Code Tax concessions for the regional legislation Generally, reduction in Tax credits, exemption residents of SEZ are Generally, reduction in profit tax and property tax from property tax of stipulated by the Russian profit tax and property tax rates. Applicable not for all certain items of Tax code rates regions; usually – for immovable property 4 Types of SEZ in Russia, support of small- and mid- including Industrial SEZ size enterprises

The opportunities are widely used by car manufacturers and automotive components producers

© 2013 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms 5 affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Tax concessions (2/6) General overview of industrial special economic zones (SEZ)

Order of application ■ Agreement should be Lyudinovo Moglino concluded with SEZ (Kaluga (Pskov administration Region) Region) Possible tax concessions ■ Reduction of CPT rate 4.5%- 18% off (i.e. CPT rate will 15.5%-2% instead of 20% statutory rate) ■ Property tax, land tax Kaliningrad (exemption) (Kaliningrad Region) Period of tax concessions application ■ Effective while resident status Lipetsk (Lipetsk is applicable Region) ■ Property tax exemption – 10 Titanium years Alabuga Togliatti Industrial SEZ with automotive Valley (Republik of (Samara specialization ■ land tax exemption – 5 years (Sverdlovsk Tatarstan) Region) Investment amount Region) ■ At least RUB 120 mln. Kaliningrad SEZ (Established by a special federal law) (approx. EUR 2.8 mln.) should ■ CPT rate is 20% off for first 6 years and up to 12.25% off for next 6 years be invested ■ Property tax 6 first years – exemption and 1.1 – 2.2% off for next 6 years

© 2013 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms 6 affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Tax concessions (3/6) Opportunities in Russian regions – examples of regional tax concessions

■ Regional authorities may provide various form of support to investors (e.g., state guarantees, cooperation with respect to obtaining land plot / development of infrastructure, etc.), but the most widespread form of support is provision of tax concessions through:

– reduction of profits tax rate down to 15,5% (as a maximum) instead of 20% / provision of subventions – reduction of property tax rate up to 0% (as a maximum) instead of 2,2%

NB! Exact percentage of reduction / availability of subventions differ from region to region

■ Tax concessions may be granted on the following basis:

– declarative basis (no preliminary permissions / agreements required) – e.g., St. Petersburg

OR

– administrative basis (required conclusion of investment agreement with the local authorities / pre-approval of investment project) – e.g., Leningrad region, Tatarstan Republic, Ulyanovsk region, etc.

■ Generally, tax concessions are granted to taxpayers who have met conditions established by regional legislation which vary from region to region

© 2013 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms 7 affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Tax concessions (4/6) Opportunities in Russian regions – examples of regional tax concessions

■ Period for which tax concessions are granted is also stipulated by regional legislation (e.g., 3-5 years, actual payback period of investment project, etc.)

■ Peculiarities that need to be taken into account – examples of common features for the majority of regions:

– priority industries (for which tax concessions are granted) may be stipulated by regional authorities / in certain regions project should correspond to the regional investment program – supplementary obligations may be imposed on investor (e.g., development of regional infrastructure, construction of roads, social obligations, etc.) – requirements on the minimum amount of investments (in particular regions) – requirements to have no outstanding tax liabilities in the period of investment project’s realization – restrictions / limitations on transfer of fixed assets during the period of tax concession application – requirement that fixed assets should not be previously in use – requirements to the period when investments should be made (e.g., starting from particular year or within 3-5 years, etc.) – requirements with respect to the certain percentage share of revenue from the investment project in the overall company’s revenue (e.g., 70% should be from the investment project) – preparation of business plan / pre-approval of investment project by regional authorities – in case administrative basis for granting tax concessions

© 2013 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms 8 affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Tax concessions (5/6) Opportunities in Russian regions – examples of regional tax concessions

Regional tax concessions (several regions with high concentration of automotive business as examples)

Leningrad region: Criteria St. Petersburg : Law Nizhny Novgorod Law 81-11 Kaluga region Tatarstan Republic Ulyanovsk region Samara region № 113-oz dated region dated 14.07.1995 29.12.2012

Order of Administrative Administrative Administrative Administrative Administrative Administrative Declaratory application (Permissive) (Permissive) (Permissive) (Permissive) (Permissive) (Permissive)

Profit tax Profit tax Profit tax Profit tax ↓ 4,5% off (15,5% Profit tax ↓ 4,5% off (15,5% Profit tax Profit tax ↓ 1% - 4,5% off ↓ 4,5% off (15,5% rate instead of 20%) ↓ 4,5% off (15,5% rate instead of ↓ 4,5% off (15,5% ↓ 4,5% off (15,5% Possible tax rate instead of rate instead of 20%) 20%) rate instead of 20%) rate instead of 20%) Property tax concessions 20%) Property tax (exemption or Property tax Property tax (full (exemption or Property tax (0% - Property tax Property tax application of (exemption) exemption or application of 0,1% 1.1%) (exemption) (exemption) 0,55%-1,65% rate) partly) rate) Profit tax: 5 years up to 7 years (up to 5 – 15 years 4 – 8 years 1 – 7 years 13 years regarding (inclusively) 5-7 years Period of tax 7 years for profit depending on volume (inclusively) 4 – 7 years the projects in the (inclusively) concessions tax (in terms of of investments and depending on depending on volume machinery Property tax: Depending on type of application minimum type of business volume of of investments manufacturing 5 – 15 years investment project investment amount activity investments of 15 billion RUB) industry) (inclusively)

Minimum amount is Minimum amount is RUB 50 mln. (for RUB 100 mln. (for Investment Minimum amount is Minimum amount Minimum amount is Minimum amount is some districts) profit and property Minimum amount is amount RUB 800 mln. is RUB 100 mln. not stipulated RUB 200 mln. RUB 300 mln. (for tax concessions RUB 100 mln. other districts) application)

© 2013 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms 9 affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Tax concessions (6/6) Opportunities in Russian regions - typical stages of obtaining regional tax concessions

Based on our experience of similar projects, the process of obtaining of regional investment tax concessions consists from the following main stages:

Stage 1 Stage 2 Stage 3 Stage 3 Stage 4

Some regions Preparation of Negotiation of Preliminary analysis Conclusion of the require annual documents conditions of the of a possibility of Investment confirmation of application of tax necessary to obtain Investment Agreement with the investment project and non-tax benefits benefits and Agreement with the regional authorities implementation and incentives incentives regional authorities progress

– Analysis whether – Preparation of – Providing the regional – Usually, the tax benefits are detailed business authorities with confirmation is in possible to obtain, plan explanations related form of a report to the business plan submitted to the – Estimation of – Important to (amount of local authorities potential tax highlight social end investments, savings economic forecasted payback importance of the – Initial meeting with period, tax saving investment project regional authorities due to application of tax concessions)

Tax concessions

© 2013 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms 10 affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG in Russia

No.1 Audit Firm No.1 Audit & KPMG’s Valuation in Russia Advisory Firm team: Winner of the Audit market share – Top-100 Russian in Russia Big Consulting’12 Award in the Public companies* Opinion nomination

2009–2012 гг. 2011 г. 2012 г. #1 7% Audit 10,5% Tax Firm KPMG of the Year European Energy Audit Company of 33% in Russia Tax Team the Past 5 Years by of the Year Financial Elite of PwC Russia Awards firm 23,5% EY 2012 - 2013 гг. 2011 г. 2010 г. Deloitte 26% Other

Insolvency No.1 Reporting Advisory Firm Best Reporting Accountant of the Year Accountant in Russia by number in Russia of transactions and overall value

2010 г. 2010 г. 2010 г. * Source: Expert-400 Rating, 2013

© 2013 ZAO KPMG, a company incorporated under the Laws of the Russian Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms 11 affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Alisa Melkonian Partner, Automotive sector Head of Tax & Legal KPMG North-West regional centre

Tel: + 7 812 313 73 35 Fax: +7 812 313 73 01 [email protected]

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no Natalia Nikitina guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such Senior Manager information without appropriate professional advice after a thorough examination of the particular situation. Automotive sector © 2013 ZAO KPMG, a company incorporated under the Laws of the Russian KPMG North-West regional centre Federation, a part of the KPMG Europe LLP group, and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Тел: (812) 313 73 36 The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International Cooperative (“KPMG [email protected] International”).