Russia How to Set up a Manufacturing Site Compiled by: Swiss Business Hub Russia Moscow, January 2013 With the growing importance of the Russian market, manufacturing in the country becomes increasingly popular among foreign companies. On the other hand the omnipresent bureaucracy makes such projects rather complex to handle. The current report aims to explain some challenges that might occur and possible solutions that might be needed. It is based on an event of the consulting agency “Russia Consulting”, which took place on December 18th, 2012, in Moscow. A meticulous planning is just as important for projects in Russia as everywhere else. Due to very complex regulations for registration, import, construction and other processes, it is highly recommended that agency services are being employed; a mediator, which has experience in similar projects in the relevant region, and can offer variety of support in all questions could be irreplaceable. Scheme of Stages of an Investment Project in Russia Source: Kamil Karibov, Presentation of “Beiten Burkhardt” law company: „Rechtlicher Rahmen eines Investitionsvorhabens: Wichtige Abläufe und regionale Förderung“. Moscow, December 18th, 2012. It is important to note that the approval procedure for investment projects is different in every region of Russia. During the past few years the Russian government has made efforts to 1 simplify the regulations. Reforms to improve the conditions for entrepreneurs in the construction sectors started in 2008. The roadmap for 2012 foresaw shortening of the delivery time for construction permits and a reduction of the involved state bodies. Even the costs for small-scale investment projects from foreign companies easily mount up to 10-20 million Euros due to high expenses for good quality buildings and complicated bureaucratic procedures. Important factors for the successful set up of a manufacturing plant are:  Transparent costs for land development and especially the access to electricity  Affordability of the plot of land intended for building  Developed municipal infrastructure  Qualified working force  Good transport connections  Support by the local administration A project can be declared a “preferential investment project” by the regional administration in order to get additional support. But as this is predicated on certain requirements and a lot of paperwork, it has to be checked on a case-by-case basis to confirm whether this is really an advantage. Even if an investor decides not to go for a preferential investment project, it is often helpful to sign a memorandum of understanding with the regional administration in order to ascertain the backing of the officials, concerning issues like organizational support, purchase of the plot for building, lowering land development costs, fastening approval processes, tax holidays and financing, development of municipal infrastructure. Furthermore, the regions can offer support in form of state guarantees, subventions, development of land, and others. Regional administrations are generally prepared to grant tax incentives, which can include:  Capital tax: tax holiday or reduced taxes for movables and immovables, used for the realization of the investment project.  Transport tax: tax holiday or reduced taxes for means of transport, purchased for the realization of a preferential investment project.  Real estate tax: tax holiday or reduced taxes for the land plot purchased for the realization of the investment project One of the decisions an investor has to make is the geographical location of the future manufacturing plant. As many regulations are set on a regional level, it is important to choose a region with favorable conditions and where one can count on the support of the regional administration. According to the experience of “Beiten Burkhardt” law firm’s experts, the following cities are especially popular for manufacturing projects of foreign companies (in alphabetical order): Alabuga (Special Economic Zone in Tatarstan) Astrakhan Belgorod Bryansk Kaliningrad Kaluga Kazan Kemerovo Krasnodar Krasnoyarsk Kurgan Moscow Naberezhnye Chelny Nizhny Novgorod 2 Novosibirsk Omsk Samara St. Petersburg Chelyabinsk Togliatti (Spezial Economic Zone in the Samara region) Tomsk Ufa Vologda Yekaterinburg Special economic zones and industrial parks exist in several regions. Residents of special economic zones can benefit from simplified administrational procedures, easy purchase of land plots, autonomous infrastructure, flexible construction rules and high quality services. The developers and operators of industrial parks can be either official or private entities. The Swiss company DEGA Group deals with real estate development as well as turnkey construction of industrial facilities and has been active in the Russian Federation since 2003. In 2006 it established the well-functioning Noginsk Industrial Park in the Moscow region. Other projects are in a stage of planning. When it comes to the financing of investment projects, Russia offers options similar to those other countries do. However, there are some particularities, which should be taken into account. An increase of the capital stock implies a lot of administrational work and three years later there might be a risk of underfunding. According to Russian law, the net assets at this time have to be at least as high as the capital stock. Capital contribution or financial aid of the mother company can correct this problem, but there are a lot of regulatory details in Russia, which hamper the financial support of the mother company. Another possibility for financing is a loan of the mother company with the same risk of underfunding after three years. A loan waiver by the mother company is generally possible, but taxable. Furthermore there is a thin cap regulation in the Russian law, which states that the loans/equity ratio should not exceed 3:1 for companies, more than 20% of which is owned by a foreign entity. Bank loans are available, but usually more expensive than in other European countries. The import of construction materials and equipment for the future plant is a separate issue, which should be given the necessary attention, as well. On the one hand, it can cause a lot of troubles due to the complicated bureaucratic and customs procedures. On the other hand, one has the possibility to save a considerable sum on taxes and fees if one knows how to declare the goods to bypass the additional tax burden. Since the import of investment goods is not quite the same as the import of products for sale, a consultation by an expert can be useful even if customs and logistics departments already exist within the company. Useful addresses: Russia Consulting www.russia-consulting.eu Mr. Helge Masannek Lawyer, Director of the Tax and Legal Department E-mail: MasannekH@russia-consulting.eu Phone: +7 495 956 55 57 BEITEN BURKHARDT Rechtsanwaltsgesellschaft mbH (Moskau) www.bblaw.com Kamil Karibov Partner, Ph.D. E-Mail: Kamil.Karibov@bblaw.com Phone: + 7 495 232 96 35 3 DEGA Group www.dega-ag.com Mr. Gabriel Gantner Director Russia E-mail: russia@dega-ag.com Phone: +7 495 785 63 96 Author: Julie Bächtold, Moscow, January, 15th 2013 Senior Trade Adviser Author’s address: julie.baechtold@eda.admin.ch 4