Offshore zones in the Kaliningrad region and Primorsky Krai for international companies

Federal Law No. 291-FZ dated August 3, 2018 (“Law No. 291-FZ”) provides for the creation and operation of special administrative districts on the territories of Russky Island (Primorsky Territory) and Oktyabrsky Island (Kaliningrad Region) in order to create an investment-attractive environment for Russian and foreign investors.

A number of other federal laws dated August 3, 2018 provide for tax benefits and a special currency regime for international companies registered in special administrative regions.

1. Participants in the special administrative region

A management company is created in a special administrative region - a Russian legal entity, which is entrusted with the functions of ensuring the functioning of the corresponding region. On the territory of Russky Island (Primorsky Territory), such a company is a management company determined by the Government of the Russian Federation to ensure the functioning of territories of rapid socio-economic development in the Far Eastern Federal District, or its subsidiary.

A foreign legal entity, with the exception of a credit organization, non-credit financial organization, payment system operator and payment infrastructure service operator, which:

1. entered into an agreement with the management company on the implementation of activities in the territory of the special administrative region (hereinafter referred to as the agreement on the implementation of activities), establishing the types of activities of a participant in the special administrative region, the conditions for carrying out such activities, the rights, obligations and responsibilities of the parties;
2. passed state registration as an international company through the procedure of redomiciliation and was included by the management company in the register of participants in the special administrative region.

The application of a foreign legal entity for concluding an agreement on the implementation of activities shall be accompanied by documents confirming the applicant’s compliance with the requirements for an international company, as well as other documents provided for by the Federal Law “On International Companies” for obtaining the status of an international company.^[1]

Within five working days from the date of the decision to conclude an agreement on the implementation of activities, the management company is obliged to send a draft of such an agreement to the applicant.

The management company enters information about the participant in the special administrative region into the register of participants in the special administrative region no later than one day from the date of state registration of the international company.

In this case, the person loses the status of a participant in the special administrative region in the event of termination of the agreement on the implementation of activities.

Participants in a special administrative region have the right, in particular:

• receive land plots and build infrastructure facilities in the manner prescribed by land legislation and legislation on urban planning activities;
• involve persons carrying out auxiliary activities;
• determine auxiliary activities necessary to support the activities of participants in the special administrative region.

The activity agreement may contain an arbitration agreement on the transfer of disputes arising from the activity agreement to an arbitration court administered by a permanent arbitration institution.

If a direct agreement on this is concluded between the parties to the dispute, a determination to issue a writ of execution for the forced execution of an arbitration award is made by the Arbitration Court of the Kaliningrad Region or the Arbitration Court of the Primorsky Territory within 14 days from the date of receipt of the application for the issuance of a writ of execution without holding a court hearing.

Law No. 291-FZ, with the exception of provisions on the powers of government bodies, bodies of the Social Insurance Fund of the Russian Federation in the territory of a special administrative region, came into force on August 3, 2018.

2. Tax benefits for international holding companies

Federal Law No. 294-FZ dated August 3, 2018 introduced changes to the Tax Code of the Russian Federation (TC RF) regarding the specifics of taxation of international holding companies.

An international holding company is an international company registered in accordance with the Federal Law “On International Companies”, which simultaneously satisfies the following conditions:

1. the international company is registered by way of redomiciliation of a foreign organization that was created in accordance with its personal law in the period before January 1, 2018;
2. the international company, no later than 15 days from the date of its registration, submitted to the tax authority at the place of registration the necessary documents and information: (financial statements for the last financial year completed before the date of registration, an auditor's report on the financial statements that does not contain a negative opinion or refusal to express an opinion, information about the controlling persons of the international company);
3. the controlling persons of an international company on the date of its registration in the procedure of redomiciliation of a foreign organization became the controlling persons of such a foreign organization in the period before January 1, 2017.

The controlling person of an international company, as well as a foreign organization by way of redomiciliation of which such an international company is registered, is recognized as an individual or legal entity whose share of participation in this international company (for individuals - together with spouses and minor children) is more than 15%.

Changes made to Chapter 25 of the Tax Code of the Russian Federation, which come into force on January 1, 2019, establish corporate income tax benefits for international holding companies.

Income of an international holding company in the form of profits of controlled foreign companies in respect of which such an international holding company is recognized as a controlling person, subject to accounting when determining the tax base of this international holding company for tax periods ending before January 1, 2029, is not included in the tax base.

Features are provided for the formation of the value of property (property rights) by international companies and foreign organizations recognized as tax residents of Russia.

The following corporate income tax rates have been established:

• 0% - for income received by an international holding company in the form of dividends, provided that on the day of the decision to pay dividends, the international holding company has continuously owned for at least 365 calendar days at least 15% (shares) in the authorized (share) capital (fund) of the organization paying dividends or depositary receipts giving the right to receive dividends in an amount corresponding to at least 15% of the total amount dividends paid by the organization [3]
• 5% - on income received by foreign persons in the form of dividends on shares (stakes) of international holding companies that are public companies on the date of payment of dividends, until January 1, 2029.

Conditions are provided under which, if simultaneously met, international holding companies apply a tax rate of 0% to the tax base determined by income from operations on the sale or other disposal (including redemption) of participating interests in the authorized capital of Russian and (or) foreign organizations, as well as shares of Russian and (or) foreign organizations:

1. shares (shares in the authorized capital) of a Russian or foreign organization [4] on the date of their sale or other disposal (including redemption) are continuously owned by an international holding company, by right of ownership or other proprietary right, for at least 365 calendar days and constitute at least a 15 percent contribution (share) in the authorized (share) capital (fund) of such organization;
2. shares (participation interests) constitute the authorized capital of organizations, no more than 50% of whose assets as of the last reporting date preceding the date of sale or other disposal (including redemption) directly or indirectly consist of real estate located on the territory of the Russian Federation;
3. shares (shares in the authorized capital) of a Russian or foreign organization were not contributed (transferred) to the authorized capital of an international holding company, or acquired by such a company as a result of reorganization within 365 calendar days before or after the date of registration of such a company as an international company.

The first tax (reporting) period for international companies recognized as tax residents of the Russian Federation is the period starting from the date of registration of the foreign organization as an international company.

3. Currency regime for international companies

Federal Law No. 293-FZ dated 08/03/2018 amended the Federal Law “On Currency Regulation and Currency Control”, providing for a special currency regime for international companies - foreign legal entities registered by redomiciliation in special administrative regions in the Kaliningrad Region and Primorsky Territory.

Foreign legal entities registered in accordance with the Federal Law “On International Companies” are classified as non-residents for the purposes of currency regulation and currency control. This means that settlements in foreign currency and other currency transactions between international companies and residents can be carried out without restrictions (with the exception of the purchase and sale of foreign currency and checks, the nominal value of which is indicated in foreign currency, which in Russia is carried out only through authorized banks and the state corporation "Bank for Development and Foreign Economic Affairs (Vnesheconombank)").

It is clarified that non-residents have the right, without restrictions, to make transfers of foreign currency and the currency of the Russian Federation among themselves on the territory of Russia without opening bank accounts, settlements in cash foreign currency or the currency of the Russian Federation, taking into account the maximum amount of cash payments provided for by the legislation of the Russian Federation, as well as make transfers of foreign currency and the currency of the Russian Federation without opening bank accounts from the territory of the Russian Federation and receive transfers of foreign currency and the currency of the Russian Federation on the territory of the Russian Federation without opening bank accounts accounts.

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[1]More information about obtaining the status of an international company:https://gratanet.com/ru/publications/details/18815-alert-russia-international-companies.

[2] This condition does not apply to:

- international companies that are public companies as of January 1, 2018;

- international companies in which the total share of direct and (or) indirect participation of the international company specified in subparagraph 1 of this paragraph is 100 percent.

[3] If the organization paying dividends is foreign, the tax rate established by this subparagraph is applied to organizations whose state of permanent location is not included in the list of states and territories approved by the Ministry of Finance of the Russian Federation.

[4] The specified rate applies provided that the state of permanent residence of such foreign organizations is not included in the list of states and territories approved by the Ministry of Finance of the Russian Federation.

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