Why Invest in Russia?
Why Invest in Russia?Updated on Monday 17th August 2020
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Russia offers many and diverse opportunities for foreign companies that want to invest in Russia. Any foreign individual or company is allowed to open a business in Russia. They can choose between the four types of companies available for registration: limited liability companies, closed and open joint stock companies, branch or representative offices, sole traders.
Each type of company is subject to certain requirements and that is why it is best to ask for the advice of a Russian law firm in order to find out what type of business suits you best before investing in Russia.
If you are foreign investor and are interested in starting a business in Russia, our lawyers can guide through the company registration process.
Special economic zones in Russia
Russia provides 28 special economic zones divided into four classes for foreign investors wanting to invest in Russia and set up a company. The 28 Russian special economic zones (SEZ) are divided into:
- six industrial and production zones,
- 14 touristic and recreational zones,
- five technology and innovation zones,
- three port zones.
The Russian special economic zones are situated in the most developed regions of the country and many hi-tech and research companies are established there. Many large international companies have already opened subsidiaries in these zones that have also attracted a large number of workers.
What are the benefits of the special economic zones in Russia?
One of the greatest advantages of the Russian special economic zones is that foreign investors deciding to open companies there will reduce start-up costs with approximately 30% compared to other areas in the country. Russian residents of SEZ will also benefit from reduced income tax rates that range between 0 and 13.5% compared to the normal rate of 20%. Those investing in Russia and buying a property in any of the 28 special zones will benefit from 10 to 15 years of tax exemption. Foreign investors will be benefit from 5 to 10 years exemptions from the land tax applied at federal level.
The special custom regime is another great advantage for businessmen who are not required to pay customs duty and VAT for foreign goods. Investors also have the possibility to reduce the time spent with the first stages of their projects by submitting all documents with the Russian system “single window”. Specialized foreign workforce will also benefit from a simplified migration system if moving to one of the special economic zones in Russia.
The most important free zones for foreign investment in Russia
As mentioned above, Russia has nearly 30 free zones which are very important for its economy because of the incentives available to foreign investors interested in doing business here. Some of these free zones are located near large cities, thus making Russia even more appealing from an FDI point of view.
Vladivostok Free Port is of the key special economic areas in which foreign investment is encouraged in Russia. Those who set up operations here can benefit from many tax reductions, among which the following are worth mentioning:
- a 5% profit tax for the first 5 years of activity;
- a 12% profit tax for the next 5 years;
- no land and property taxes;
- lower social insurance premiums;
- no import taxes.
Compared to the profit taxes presented above, foreign investors should know that outside this zone, the national tax is levied at a rate of 20%, making Vladivostok quite appealing from an FDI point of view.
Other aspects that can be taken into account by those interested in Russia for FDI purposes are related to the fact that Vladivostok offers great opportunities and facilities for industries like light manufacturing and diamond trading from the Siberian region through the Eurasian Diamond Exchange. Also, the visa issuance procedure is much simpler in this free zone, as foreign businesspersons can obtain electronic visas in no more than 8 days.
Vladivostok Free Port is connected to China, Korea and Japan through the Trans-Siberian railway.
Another free zone with direct connection to the Trans-Siberian railway is Tomsk Industrial Special Economic Zone which is divided into two areas: the northern one in which industries like petrochemicals and chemicals thrive, and the southern part which is dedicated to innovative and hi-tech industries. This free zone offers similar tax reductions to Vladivostok Free Port.
If you are interested in foreign investment in Russia, you can obtain more information on the regulations available for setting up a business as an overseas businessman from our lawyers.
Our law firm in Russia is at your service if you want to register a business in this country.
The foreign investment climate in Russia
Russia has enabled a law on foreign investment in 1999 that provides foreign companies that want to invest in Russia the same benefits as Russian companies. The foreign investment climate improved over the last few years, especially since Russia is making big progress in its adherence to the World Trade Organization (WTO).
Russia is also trying to adhere to the Organization for Economic Cooperation and Development (OECD) in order to have more access to international markets and draw more foreign investors.
Foreign investments are encouraged in Russia through the diminishing of taxes and reforms of the economic sector. Russia also possesses a skilled and highly trained workforce which makes the country more appealing to foreign investors. The Russian government encourages foreign companies to invest in the oil and gas sectors, food and distribution segments and the energy area.
Russia’s maritime sector for FDI
With access to the Barents Sea, the Black Sea, the Sea of Japan and even the Pacific and Arctic Oceans, Russia is definitely the country to attract FDI in the maritime sector. Those seeking to obtain various benefits can turn their attention to the Sovetskaya Gavan free zone which is a port city on the Far East Coast and offers access to the Sea of Japan.
Shipping is the main industry in this special economic zone which hosts ship repair, fish processing and logistics facilities for those who want to open companies here.
Why invest in hi-tech in Russia?
In the last few years, Russia has started investing in the development of high-tech infrastructure in order to attract foreign investment. This is how no less than 5 special economic zones were created. Among these, Titanium Valley, which is located in Sverdlovsk, in the region of Yekaterinburg. Foreign investors who want to open business here will benefit from a reduced profit tax of 2% and tax exemptions from the land and property taxes. This free zone mixes traditional industries such as metallurgy and innovative ones such Titanium production and aviation and engineering.
The other important special economic zone is Innopolis which was developed as a technology park and which is set to become the most important IT center in the country.
Those attracted by large cities can set up companies in the Moscow Technopolis special economic area where they can invest in sectors like biotech, robotics, micro-electronic and renewable energy.
Foreign investors who want to open innovative businesses in Russia can rely on the support of our lawyers. We can also provide more information on foreign investment regulations in Russia.
Types of legal entities available for foreign investors in Russia
In the past few years, Russia has made great progress in welcoming foreign investors who can operate here under various structures. In terms of company incorporation, entrepreneurs from all over the world can use the same vehicles as local ones, among which the sole trader, the partnership and the limited liability company are known in other countries, thus offering a sense of familiarity. The registration requirements are different for each structure, however, our Russian lawyers can help an investor understand which type of business form can be employed based on his or her need.
Foreign companies can also extend their operations here through branch offices and subsidiaries. These can also benefit from Russia’s double taxation agreements. As one of the largest economies in the world, Russia has quite an extended network of such treaties to the benefit of foreign investors.
Investment incentives in Russia
Russia has privileged domains in which foreign investors can put their money in. In 2005, a special economic area was created in the domains of innovation, industrial production, nuclear and information technologies, in the petroleum sector and the automobile industry.
Other investment incentives in Russia have the form of reduced tax rates, such as property tax exemptions, reduced rates of 14% for social security and 70% deduction in the innovation segment. Foreign investors can set up companies in privileged zones such as: Dubna, Zelenograd, Strelma, Tomsk, Lipetsk and Yelabuga. Russia has also free zones set up at: Kaliningrad, Nakhodka, Ingushetia and Magadan, where companies benefit from custom exemptions on imports.
Protection of foreign investments in Russia
In terms of protection of foreign investments, Russia has enforced over 30 bilateral investment treaties (BITs) with European countries, China, Canada, Japan, India, Egypt and South Africa. It is also a member state of the Multilateral Investment Guarantee Agency and, in case of dispute settlements, the rulings of the International Court of Arbitration, International Chamber of Commerce and of the Arbitration Institute of Stockholm Chamber of Commerce will be enforced by the Russian judicial system.
Russia’s adherence to international conventions
In order to attract foreign investment, Russia has adhered to many international conventions during the years. Among these, we can mention the Convention on the Recognition and Enforcement of Foreign Arbitral Awards and the United Nations’ Convention on Contracts for the International Sale of Goods.
Apart from these, Russia has signed numerous bilateral investment treaties with countries like the Netherlands, the UK, the UAE, Singapore, Portugal, Croatia, Luxembourg, Belgium, Venezuela and Argentina.
Russia has also entered various double taxation agreements in order to avoid the levy of certain taxes on foreign investors coming here.
The legal framework regarding investing in Russia
Russia has a special legislation regarding foreign investment in strategic sectors. The main regulatory legislation is the Federal Law No. 57-FZ on the “Procedure of Making Foreign Investments in Companies of Strategic Importance for National Defense and State Security”.
The law was enabled in April 2008 and it is shortly known as the Strategic Investment Law that refers to the regulations on foreign investments in Russian industries and sets the procedures through which foreign enterprisers are allowed to access the “one stop shop” in the strategic industries. The Strategic Law applies to any foreign investor, company or individual, including Russian companies that are controlled by foreign enterprisers, and it also to foreign governments and international organizations that have opened subsidiaries in Russia, usually referred to as public foreign investors.
According to the Federal Law No. 57-FZ, a strategic entity is a business registered in Russia that undertakes at least one activity of strategic importance. There are 45 types of activities considered of strategic relevance according to the same law. These activities can be broadly encompassed in four categories:
- natural resources,
The Strategic Investment Law was amended in 2011, when certain operations were excluded from the strategic activities list, among these the cryptographic operations of banks. Banks in which the Russian government is not a stakeholder will not be granted special licenses and will not be deemed strategic activities, if distributing encryption equipment, provide maintenance of such equipment and provide encryption services.
Other laws regarding foreign investments in Russia
The Strategic Investment Law is not the only legal framework regulating foreign investments in Russia, but it is the most complex. Other laws referring to FDIs in Russia are:
- the Law “On Investment Activity in the RSFSR” of 1991,
- the Law “On the Stock Market” of 1993,
- the federal laws no. 39 and no.160 “On Foreign Investments in the Russian Federation” of 1999,
- the Federal Law no. 173 “On Currency Exchange Regulation and Control” of 2003,
- the Federal Law no. 116 “On the Special Economic Zones within the Russian Federation” of 2005.
Foreign investors investing in Russia and setting up a company in Russia should know that several industries have recently developed. At the level of 2018, the Gross Domestic Product (GDP) was established at $ 1657.6 billion; an important aspect is that the Russian GDP represents an important percentage of the world economy. In 2019, Russia's GDP was $ 1,750 billion, representing 1.44% of the world economy.
Entrepreneurs interested in the business environment available in Russia should know that governmental policies, which were enforced in June 2015, are offering important incentives created to attract foreign investments. As such, the Russian authorities will offer a two year tax exemption to small companies recently incorporated in Russia.
Sole traders will also be offered a 5 years tax break, applicable between 2015 and 2020.
Increasing rankings in worldwide reports
One of the main reasons to invest in Russia at the moment is the high scores Russia has started to obtain in some of the most prestigious worldwide reports and rankings. As an example, in 2019, Russia climbed 89 positions in the World Bank’s Doing Business report compared to 7 years ago, ranking 31st. This is the most important progress made by a country among all 190 economies surveyed by the World Bank. Moreover, Russia entered the top 100 on all 10 sections of the report which is a clear indicator of the progress made the country from a business environment point of view.
The legislation has been modified to the benefit of business owners, no matter if they are local or foreign, by providing enhanced ownership and capital protection. Among the latest changes in the regulations associated with doing business in Russia, we can mention that the country is now a member of the World Trade Organization and of the Eurasian Economic Union, thus committing to their regulations and easing trading relations with the most important economies in the world.
The latest amendments to the Foreign Investment Law also add new categories of investors to the foreign enterprisers. The Law now provides for the following types of investors:
- foreign companies that are not controlled by Russian businesses and individuals;
- foreign citizens who are not Russian nationals;
- foreign governments and international organizations, but also companies under their control;
- companies registered in Russia totally or partially owned by foreign investors;
- foreign citizens who have obtained Russian citizenship in the meantime.
The last two categories of investors were recently added to the amended Law. Our lawyers in Russia can offer more information on the extended benefit for foreign investors seeking to do business in this country.
Improved taxation system
Russia has also evolved substantially from a taxation point of view, as the past few years have brought various changes which rely mostly on the adoption of international standards. This way, Russia has managed to integrate the national tax system into the global one. New investments will benefit from various tax advantages in Russia’s Special Economic Zones and the recently created and Priority Development Territories.
The current corporate tax is set at 20%, with 17% entering the federal budget and 3% to regional ones. However, this rate can be reduced by the regional authorities for certain taxpayers. These reductions are available the Development Territories and Special Economic Areas.
Apart from these tax deductions, the government has also implemented no less than 900 support measures for investors. These measures are available at federal and local level for various industries, among which:
- research and development;
Among the countries to invest the most in Russia in 2019, we can mention the following:
- Switzerland which has invested 24,7 million USD in manufacturing in the Lipetsk Region;
- France which has injected 6,8 million USD in the food and beverage sector in the Belgorod Region;
- China which has injected 1,5 million USD in the wood processing sector in the Sverdlovsk Region;
- Germany which has invested 120,5 million USD in the pharmaceutical sector in the Lipetsk Region.
Germany has also invested in the Krasnodar Region in a logistics center worth 13 million USD, while Italy has created a household production facility worth 78 million USD in the Orel Region.
Main industries in Russia
Russia is a world player in terms of many industries. However, the most important industries in Russia are energy - related, such as oil and gas, as the Russian state is the world’s leading natural gas producer. Other important industries in Russia are:
- pharmaceutics - Russia is the world’s 8th largest pharmaceutical market;
- real estate - at the level of 2015, the real estate market reported a significant increase, with a particular interest in the commercial real estate sector; foreign investors are attracted to this field, as 40% of the foreign direct investments in 2015 were registered in the real estate sector. In terms of commercial real estate investments, the most attractive sectors for foreign investors were represented by office space purchases and retail.
- aluminum – Russia is the world’s leading economy in this field.
Russia is an important producer and exporter of natural resources such as minerals and gold.
Business sectors unavailable to foreign investors in Russia
Although foreign investments are allowed in a wide area of business fields, several industries can’t be accessed by foreign investors or, if they do, there are special limitations imposed, as the sectors are considered to have a strategic importance for the Russian state.
Foreign investors are forbidden to own voting rights that will give them the right to control Russian companies involved in strategic fields, such as:
- mining activities related to the extraction of mineral resources;
- aerospace industry;
- military activities.
For information about investment incentives available for foreign enterprisers and other details about foreign investment in Russia, you can contact our Russian lawyers.