Legal opinions
Regional Investment Project: Tax Issues
10 March 2020
BBNP lawyers helped the Russian subsidiary of a large Finnish company to correctly determine the tax regime to be applied in the process of implementation of a regional investment project.
A company sought advice from BBNP specialists relating to taxation under the regional investment project ("RIP"). The company was a party to an investment contract made with the administration of the Kostroma Region on 27 November 2013 – almost immediately after the Law on RIP Implementation in the territories of individual constituent entities of the Russian Federation¹ entered into force.
Starting from the date of the contract, the client was entitled to tax exemption in the form of a reduced income tax rate while implementing the RIP². However, after the completion of the investment project, the company had difficulties with the correct calculation and payment of tax to the regional budget due to the fact that the obligations under the contract had been fulfilled prior to the end of the income tax period, and the company's activities were continued, since they were carried out in the field of the production cycle using complex technical processes. As a result, the income received due to the RIP implementation made less than 90% of the total income of the company in the current tax period².
Since the RIP participant did not meet the criteria of territorial activity³, then the regulation on the tax benefit for 10 tax periods was not applicable to it. The application of the preferential rate beyond the permitted period entails the creation of an unjustified tax benefit for a taxpayer, which may lead to the implementation of tax control measures and the imposition of tax liability measures.
When solving this problem, BBNP specialists examined all the necessary sources: the investment contract, since it is a primary document establishing the obligations of the parties; the provisions of the Tax Code of the Russian Federation determining the scope of application of the special tax regime; regional regulatory legal acts that define the powers of regional authorities to enter into such contracts and describe in detail the tax benefits and conditions for application thereof for companies participating in projects. Having done this work, as well as having analyzed the law enforcement practice, BBNP specialists determined the exact period and procedure for calculating the client's income tax, provided a report on the company's tax regime during the RIP implementation, and recommended that the client did not apply tax benefits outside the period established by the contract, despite the fact that the tax period was not over.
Following BBNP recommendations, the client refused to apply tax benefits outside the established period, thereby protecting its business from tax prosecution and the associated huge sanctions.
Following BBNP recommendations, the client refused to apply tax benefits outside the established period, thereby protecting its business from tax prosecution and the associated huge sanctions.
In our country, there are regions where the revenue part of the budget is replenished mainly at the expense of funds provided as federal financial assistance under budget legislation. Realizing the need to correct such situation, the government tries to create a favorable investment climate in these regions in various ways, including using tax benefits and/or special tax regimes.
In order to develop business at the regional level, Federal Law No. 267-FZ "On Amendments to Parts One and Two of the Tax Code of the Russian Federation in Terms of Stimulating the Implementation of Regional Investment Projects in the Territories of the Far Eastern Federal District and Individual Constituent Entities of the Russian Federation" dated 30 September 2013 was adopted. Due to this, a new form of investment activity has appeared in the legal system of the Russian Federation – a regional investment project. In addition to introducing the concept of an investment contract, defining the specifics of entry into it, execution thereof, and other relationships between the parties to such contract, tax benefits were established for participants in these projects.
However, the application of tax benefits by RIP participants is complicated by the complicated procedure for their application, by a complicated accounting mechanism for these purposes, as well as by bureaucratic components.
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¹ Federal Law No. 267-FZ "On Amendments to Parts One and Two of the Tax Code of the Russian Federation in Terms of Stimulating the Implementation of Regional Investment Projects in the Territories of the Far Eastern Federal District and Individual Constituent Entities of the Russian Federation" dated 30 September 2013
² Taxpayer participating in a RIP is entitled to apply tax rates to the tax base in the amount and in the manner provided for in Article 284.3 of the Tax Code of the Russian Federation, provided that income from the sale of goods produced as a result of the RIP implementation, is at least 90% of total income taken into account when determining the tax base for the purpose of income tax in accordance with Chapter 25 of the Tax Code of the Russian Federation, excluding income in the form of positive exchange differences provided for in paragraph 11 of Article 250 of the Tax Code of the Russian Federation
Tax base, i.e. the monetary expression of the profit received from investment project implementation, is determined on the basis of data from separate accounting of income (costs) received (made) during the implementation of such investment project, and income (costs) received (made) during the implementation of other economic activities
Article 284.3 of the Tax Code of the Russian Federation establishes the time limits for the use of preferential rates by taxpayers participating in RIP, namely: the preferential rate is applied within ten tax periods starting from the tax period in which, according to tax accounting data, the first income from the sale of goods produced as a result of a regional investment project implementation, was recognized. The Tax Code of the Russian Federation also establishes other maximum time limits for applying the relevant tax benefit. Herewith, both the period of application of the tax benefit itself and the moment of the end of application can be established by regional legislation in the relevant reporting/tax period. The end of the application of the benefit is also possible in the next reporting period, although the tax period was not over
³ Sub-paragraph 1 of paragraph 1 of Article 25.8 of the Tax Code of the Russian Federation
Case Description
A company sought advice from BBNP specialists relating to taxation under the regional investment project ("RIP"). The company was a party to an investment contract made with the administration of the Kostroma Region on 27 November 2013 – almost immediately after the Law on RIP Implementation in the territories of individual constituent entities of the Russian Federation¹ entered into force.
Starting from the date of the contract, the client was entitled to tax exemption in the form of a reduced income tax rate while implementing the RIP². However, after the completion of the investment project, the company had difficulties with the correct calculation and payment of tax to the regional budget due to the fact that the obligations under the contract had been fulfilled prior to the end of the income tax period, and the company's activities were continued, since they were carried out in the field of the production cycle using complex technical processes. As a result, the income received due to the RIP implementation made less than 90% of the total income of the company in the current tax period².
Since the RIP participant did not meet the criteria of territorial activity³, then the regulation on the tax benefit for 10 tax periods was not applicable to it. The application of the preferential rate beyond the permitted period entails the creation of an unjustified tax benefit for a taxpayer, which may lead to the implementation of tax control measures and the imposition of tax liability measures.
When solving this problem, BBNP specialists examined all the necessary sources: the investment contract, since it is a primary document establishing the obligations of the parties; the provisions of the Tax Code of the Russian Federation determining the scope of application of the special tax regime; regional regulatory legal acts that define the powers of regional authorities to enter into such contracts and describe in detail the tax benefits and conditions for application thereof for companies participating in projects. Having done this work, as well as having analyzed the law enforcement practice, BBNP specialists determined the exact period and procedure for calculating the client's income tax, provided a report on the company's tax regime during the RIP implementation, and recommended that the client did not apply tax benefits outside the period established by the contract, despite the fact that the tax period was not over.
Result
Following BBNP recommendations, the client refused to apply tax benefits outside the established period, thereby protecting its business from tax prosecution and the associated huge sanctions.
For Reference
Following BBNP recommendations, the client refused to apply tax benefits outside the established period, thereby protecting its business from tax prosecution and the associated huge sanctions.
In our country, there are regions where the revenue part of the budget is replenished mainly at the expense of funds provided as federal financial assistance under budget legislation. Realizing the need to correct such situation, the government tries to create a favorable investment climate in these regions in various ways, including using tax benefits and/or special tax regimes.
In order to develop business at the regional level, Federal Law No. 267-FZ "On Amendments to Parts One and Two of the Tax Code of the Russian Federation in Terms of Stimulating the Implementation of Regional Investment Projects in the Territories of the Far Eastern Federal District and Individual Constituent Entities of the Russian Federation" dated 30 September 2013 was adopted. Due to this, a new form of investment activity has appeared in the legal system of the Russian Federation – a regional investment project. In addition to introducing the concept of an investment contract, defining the specifics of entry into it, execution thereof, and other relationships between the parties to such contract, tax benefits were established for participants in these projects.
However, the application of tax benefits by RIP participants is complicated by the complicated procedure for their application, by a complicated accounting mechanism for these purposes, as well as by bureaucratic components.
__________________
¹ Federal Law No. 267-FZ "On Amendments to Parts One and Two of the Tax Code of the Russian Federation in Terms of Stimulating the Implementation of Regional Investment Projects in the Territories of the Far Eastern Federal District and Individual Constituent Entities of the Russian Federation" dated 30 September 2013
² Taxpayer participating in a RIP is entitled to apply tax rates to the tax base in the amount and in the manner provided for in Article 284.3 of the Tax Code of the Russian Federation, provided that income from the sale of goods produced as a result of the RIP implementation, is at least 90% of total income taken into account when determining the tax base for the purpose of income tax in accordance with Chapter 25 of the Tax Code of the Russian Federation, excluding income in the form of positive exchange differences provided for in paragraph 11 of Article 250 of the Tax Code of the Russian Federation
Tax base, i.e. the monetary expression of the profit received from investment project implementation, is determined on the basis of data from separate accounting of income (costs) received (made) during the implementation of such investment project, and income (costs) received (made) during the implementation of other economic activities
Article 284.3 of the Tax Code of the Russian Federation establishes the time limits for the use of preferential rates by taxpayers participating in RIP, namely: the preferential rate is applied within ten tax periods starting from the tax period in which, according to tax accounting data, the first income from the sale of goods produced as a result of a regional investment project implementation, was recognized. The Tax Code of the Russian Federation also establishes other maximum time limits for applying the relevant tax benefit. Herewith, both the period of application of the tax benefit itself and the moment of the end of application can be established by regional legislation in the relevant reporting/tax period. The end of the application of the benefit is also possible in the next reporting period, although the tax period was not over
³ Sub-paragraph 1 of paragraph 1 of Article 25.8 of the Tax Code of the Russian Federation
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