Doing Business in Russia Your Roadmap to Successful Investments Tax and Legal kpmg.ru 2 Doing Business in Russia Moscow © 2019 KPMG. All rights reserved. Doing Business in Russia 3 Foreword Dear Reader, This brochure has been prepared to provide you with an economic overview of Russia and to introduce the tax and legal issues that are important when planning to do business in Russia. In particular, we provide here a discussion of the benefits of investing in the special economic zones, as well as review current trends in the wider economy concerning innovation and modernisation. Russian tax and civil legislation is constantly developing, meaning that sometimes there is no clear answer to what might be considered a simple question. In such circumstances, court cases and rulings are important sources for interpreting legislation. The exchange rate used in this report is the average official exchange rate of the Russian Central Bank in February 2019, which was USD 1: RUB 65,8105. Please note that this brochure is not intended to provide tax or legal advice for any specific person or situation. Readers are strongly advised to seek professional assistance from advisors with experience of doing business in Russia before undertaking any business ventures themselves. About KPMG KPMG is one of the world’s biggest advisory, audit, and tax and legal firms. We are a global network of professional firms employing more than 207,000 outstanding professionals who work together to deliver value in 153 countries worldwide. KPMG has been working for 28 years in Russia and has more than 5,500 professionals working at 23 offices spread across 9 CIS countries. In recent years, KPMG in Russia and the CIS has been one of the fastest growing KPMG practices in the world. KPMG has been consistently rated the No.1 audit firm in Russia from 2009-2018 by Expert RA* and was named Transfer Pricing Firm of the year in Russia from 2014-2018 and Tax Advisory Firm of the year in 2014-2018 in Russia by International Tax Review magazine. Moscow St. Petersburg Nizhny Novgorod Voronezh Kazan Perm Rostov-on-Don Ekaterinburg Kiev Lvov Minsk Yerevan Krasnoyarsk Ufa Tbilisi Novosibirsk Almaty Vladivostok Baku Atyrau Bishkek Tashkent Nur-Sultan * RAEX (Expert Rating Agency), Largest Audit Organizations, in 2009–2018 © 2019 KPMG. All rights reserved. 4 Doing Business in Russia Saint Petersburg © 2019 KPMG. All rights reserved. Doing Business in Russia 5 Contents ▌ Introduction to Russia 6 ▌Special tax regimes 31 Country snapshot 6 Unified tax on imputed income 31 Measures for encouraging innovation Simplified taxation system 32 and modernisation in the economy 6 Unified agricultural tax 32 — Special Investment Contracts (SPIC) — Regional Investment Projects (RIP) ▌General Comments on Transfer ▌Pricing 33 ▌Starting a Business in Russia 9 Legal structures for starting a business in Russia 9 — Direct sales ▌CFC rules in Russia 37 — Distributorship contract Corporate tax residency rules 38 — Representative office or branch Beneficial ownership requirement 38 — Russian subsidiary — Join stock companies ▌Personal Income Tax 39 — Limited liability companies Tax base 39 — Economic partnership Other taxes payable by individuals 41 Foreign investment law 12 Other business issues 13 — Licensing requirements ▌Financial Reporting 42 — Land ownership Russian Accounting Principles 42 Statutory reporting requirements 43 ▌ Company Law 14 Audit requirements 44 New industry accounting standards Liabilities 14 for non-credit financial organisations 44 Registration 14 Reorganisation 16 ▌Appendices 46 Appendix 1. ▌Labour Law 17 Chart of Withholding Tax Rates 46 Labour regulations 17 Appendix 2. Employment conditions 18 Fines for the most widespread tax Work permits for foreign nationals 22 and customs violations 52 Appendix 3. ▌Business Taxation 23 KPMG’s Tax & Legal Department 54 Tax system overview 23 Glossary of terms 55 Tax registration requirements 23 New approach to identifying unjustified tax benefit 24 — Value Added Tax — Profits tax — Social Security Contributions — Withholding income tax — Property tax — Other taxes © 2019 KPMG. All rights reserved. 6 Doing Business in Russia Introduction to Russia Country snapshot Capital: Moscow Area: 17 mln sq km Population (1 Jan 2019): > 146.8 mln (Rosstat) Cities with over 1 million citizens: 15 Number of regions: 87 President: Vladimir Putin Prime Minister: Dmitry Medvedev Currency: Rouble (RUB) Measures for The SPIC investor is free to engage other private actors to undertake certain actions encouraging innovation required by the SPIC. The possibility of and modernisation in the having several participants on the private economy side of the SPIC provides flexibility and allows for different operational models to Special Investment Contracts be deployed in the investment project. (SPIC) On the public side – depending on the General provisions investment project and designated Special Investment Contracts (SPIC) benefits – a SPIC may be concluded with are a relatively new form of cooperation the Government of the Russian Federation between the Government of Russia / (a Federal SPIC), with the Government the governments of Russia’s Regions of a Russian Region and/or municipality and private investors. Under a SPIC, an (a Regional SPIC), or with both the investor undertakes to set up a new (or Government of the Russian Federation modernise an existing) production facility, and a Russian Region and/or municipality while the Russian Federation and/or that (a Multilateral SPIC). Russian Region undertakes to provide SPICs are concluded for the period of time certain tax and non-tax benefits. in which a project starts to earn operating Voronezh © 2019 KPMG. All rights reserved. Doing Business in Russia 7 Moscow profits, plus 5 years; but not for more than Benefits for investors 3%) during the period in which the 10 years. regional profits tax incentive, SPIC investors potentially may be eligible introduced by Regional regulations, Investment projects in the following for the following key benefits: 1 applies. industries may be subject to SPICs: 1) tax incentives that may include machinery manufacturing and — reduction to 0% of the profits tax due reductions in profits tax and property to the Regional budget, depending on automotive; metallurgy; oil processing tax rates, as well as local tax the region (but not beyond 2025). and petrochemicals; gas processing; incentives; — exemption from, or reduced property charcoal, aviation and shipbuilding; 2) no increases in their tax burden, and, telecommunications, electric power, tax on, fixed assets generated within for certain regulations, guaranteed the investment project. electronic and radio electronics; regulatory stability; pharmaceuticals, medical and Some regions have introduced regional 3) “Single Supplier” status for biotechnology; forestry, pulp, paper and tax incentives for those signing a SPIC, investment projects of at least 3 including Moscow Region, Kaluga Region, wood processing; and certain agricultural billion roubles (USD45,450,000); industries (this list is not exhaustive). Leningrad Region, Nizhniy Novgorod 4) simplified procedures for obtaining Region, Perm Region, Sverdlovsk Region, SPICs are currently regulated by Federal the status of “Russian manufacturer”; and Chelyabinsk Region. The scope and Law No.488-FZ of 31.12.2014 “On the 5) simplified procedures for receiving criteria of the incentives differ from one Industrial Policy of the RF”, and by Decree land plots for the investment project; region to another. No. 708 of the Government of the RF 6) subsidies, etc. Current tax law establishes a number of of 16.07.2015 “On Special Investment Tax incentives requirements that need to be taken Contracts for Certain Industries” (amended as of 16.12.2017). Tax concessions may include profits tax into account for some SPIC projects. For and property tax incentives as follows: example, to obtain a profits tax benefit, at The regulatory framework for SPICs least 90% of the entity’s income should continues to develop, and further changes — application of a 0% profits tax rate for taxes due to the Federal budget be generated by the investment project can be expected regarding eligible (instead of the normal rate of 2% or (this is difficult to achieve in modernisation industries, benefits provided, etc. 1 It may be possible to conclude a SPIC in oil processing, petrochemicals, gas processing, charcoal, electric power, and for certain agricultural industries from July 2018.. © 2019 KPMG. All rights reserved. 8 Doing Business in Russia projects); or that tax incentives can only be Regional Investment Projects Russia’s Regions have authority to provide provided to projects that produce goods (RIP) specific tax incentives for investors (not services). implementing RIPs (e.g. reducing the The Russian Tax Code provides tax profits tax amount due to the Regional Regions are also entitled to provide incentives to those Russian organisations budget, or reducing the rate of property land tax, transport tax and regional levy that undertake Regional Investment tax). incentives. Projects (RIP). RIPs may include the The scope of incentives will also differ Obligations on investors creation of new production facilities or modernisation of existing production depending on the type of RIP: there are When concluding a SPIC, the investor facilities in Russia, and should meet RIPs where investors should first obtain takes on certain obligations, including the certain criteria. the status of being a RIP participant