A unified preferential regime in the Far East: what tax breaks are planned

A unified preferential regime is planned for investors in the Far East and the Arctic zone. The corresponding project envisages the unification of existing approaches to providing tax incentives and reduced insurance premiums for residents of the special territory.

The new regime is expected to apply to companies implementing investment projects and meeting the established conditions. Moreover, eligibility for benefits will be linked not only to resident status but also to the actual fulfillment of investment obligations.

What benefits are planned to be established?

Residents will benefit from a range of tax and other incentives. Specifically, the project proposes:

• establish a zero rate on income tax transferred to the federal budget;
• provide regions with the opportunity to set reduced rates for the portion of the income tax that goes to the regional budget;
• exempt from property tax certain objects created or acquired for the implementation of an investment project;
• establish reduced rates of insurance premiums for certain categories of residents;
• and maintain other tax benefits provided by the project related to the implementation of investment projects.

Thus, the proposed regime affects several key business payments at once and could reduce the tax burden on companies investing in the relevant territories.

Income tax benefit

For residents, it is proposed to establish a 0% rate on income tax for the portion credited to the federal budget.

The overall period of application of this rate is planned to be limited to five years. The calculation is expected to begin with the tax period in which the company first received profit from the implementation of a project under the relevant agreement.

For certain residents who carry out a public offering of securities or issue bonds, a longer period of application of the benefit is provided.

Moreover, the tax burden will also depend on regional legislation: subjects of the Russian Federation are planned to be given the opportunity to independently establish reduced rates for the regional portion of the income tax.

Exemption from property tax

A separate measure concerns property used to implement an investment project.

It is proposed to exempt from tax objects that simultaneously:

• created or acquired for the implementation of the project;
• are located in the territory of the relevant preferential regime;
• are used within the framework of the resident’s activities.

The expected period of exemption is five years. The countdown will begin in the month following the month the property is registered.

For businesses, this means the opportunity to reduce the costs of maintaining new facilities acquired or created as part of investment activities.

Reduced insurance premiums

The project also provides for a special procedure for applying reduced rates of insurance premiums.

This applies to residents who have entered into an agreement to implement an investment project and are fulfilling the established conditions. One of the proposed criteria is the investment volume—at least 100 million rubles.

The reduced rate is not intended to apply to all payments to employees, but to payments to individuals employed in new jobs created within the framework of the project.

The benefit is also limited in duration. It is proposed that the reduced tariff will be available for five years from the beginning of the month following the month in which residency status is obtained, subject to the timeframes stipulated in the draft.

Benefits will depend on the fulfillment of obligations

One of the important features of the proposed regime is the connection of tax benefits with the actual implementation of the investment project.

To maintain benefits, residents will be required to fulfill certain obligations stipulated by the agreement. Specifically, the following is expected to be taken into account:

• number of jobs created;
• volume of capital investments;
• expenses for scientific research and development;
• other indicators that may be established by regional legislation.

Acceptable deviations from planned indicators can also be determined at the regional level.

Therefore, formally obtaining residency status alone will not be sufficient to continue receiving benefits. The company will have to confirm that the investment project is being implemented in accordance with the established conditions.

How do they plan to monitor compliance with the conditions?

It is assumed that information on the resident’s fulfillment of investment obligations will be annually transferred to the tax authority by the management company.

In addition, the resident itself will be required to submit a calculation of indicators related to the volume of capital investments made and expenses on research and development.

When assessing compliance with the conditions, it is planned to take into account actual expenses incurred. The draft also establishes restrictions on certain types of expenses that should not be taken into account when determining the investment volume.

In particular, it is proposed to apply special rules to expenses on property acquired from related parties, objects previously included in fixed assets, as well as expenses incurred using budget subsidies.

What does this mean for business?

The proposed regime may be of interest to companies planning long-term investment projects in the Far East and the Arctic zone.

When assessing tax savings, it will be necessary to take into account not only the amount of benefits provided, but also the conditions for their retention.

Of particular importance to potential residents will be:

• volume of planned capital investments;
• project implementation deadlines;
• number of jobs created;
• cost structure;
• fulfillment of the indicators set out in the agreement;
• regional rules for the application of certain benefits;
• the procedure for confirming the actual fulfillment of investment obligations.

This means that tax benefits must be considered already at the project planning stage. Failure to meet established targets may impact the ability to apply the benefits later.

The project provides for a fairly broad range of preferences, but the specific conditions for their application will depend on the resident’s status, the parameters of the investment project, and the requirements established at the federal and regional levels.

Therefore, it is important for companies considering investments in the relevant territories to assess in advance not only the potential tax savings, but also their own ability to fulfill the obligations stipulated by the agreement throughout the entire period of the incentives.

If the project is adopted in its proposed concept, this could mean a transition for businesses to a more unified approach to providing preferences in the Far East and the Arctic zone, while simultaneously strengthening the link between tax incentives and the actual results of investment activities.