INVESTMENT LAWS AND TAX
INCENTIVES IN NIZHNY NOVGOROD AND NIZHNY NOVGOROD
OBLAST
February
2000
Nizhny Novgorod and its
Oblast have pioneered with investment initiatives at the regional level. In 1996, the oblast profit tax for
those enterprises paying taxes on time was lowered from 22 to 17 percent, with
federal tax at 13 percent. A
a new, simpler small business tax structure went into effect in July of 1999,
and should further stimulate small business growth. Additionally, the oblast passed
legislation to provide for preferential tax treatment to industries investing in
the region. The oblast does not
levy a personal income tax.
Enterprises also can apply to the regional administration for additional
tax benefits and credits, depending on the nature and size of their investment.
A
capital market system and a local shareholder system was created and enabling
legislation was passed to protect new shareholders and enforce corporate
governance.
Today enterprises are able
to increase their charter capital by privatizing the land on which they are
located. Land can thus become a reliable guarantee for foreign investors. An
enterprise, having purchased its land area, becomes a single property unit which
results in increasing its credit status on the legal basis. Land can become the most optimal answer
to the question of lessening the regional risk degree for crediting privatized
enterprises.
In
late 1997, to encourage foreign investments and protect foreign investors'
interests, the regional Legislative Assembly passed a law "On Guarantees of
Private Investments in the Nizhny Novgorod Oblast." Under this law, the regional
government is authorized to reduce tax rates for investment projects and provide
commitments and guarantees to foreign investors.
A
new branch office of the Russian Federal Service for Bankruptcy was established
in 1999 in Nizhny Novgorod.
Its area of responsibility includes the Nizhny Novgorod, Vladimir, Ryazan
Regions as well as the Republics of Mariy El, Mordovia and
Chuvashia.
TAXES AND THE TERRITORIAL
PRODUCTION ZONES
Tax
reduction and creation of a favorable tax environment are two of Nizhny
Novgorod’s most critical factors
for attracting foreign capital. The oblast has a simplified tax code with
payment incentives that was designed to offer significant financial advantages
regardless of location within the area.
The Teritorial Production Zones (TPZs), tax free industrial zones, offer even
greater advantages to qualified ventures.
As
of August 1, 1998 the following local taxes and duties were levied in Nizhny
Novgorod (note 1999 changes to taxes affecting small businesses above):
1)
tax on persons' property;
2)
persons' registration duty;
3)
trade duty;(applicable to suitcase shuttle traders, owners of mini-markets and
kiosks)
4)
tax on advertisements – 5% of a service value minus the
VAT
5)
licensed duty on trade in alcoholic beverages;
6)
tax on maintenance of residential houses – 1.5% of sales
volume
7)
tax on land;
8)
automobile parking duty;
9)
duty payable by owners of dogs;
10)
aggregate tax for the needs of militia and education, paid by businesses from
company revenues at the rate of 3 percent and calculated on the basis of the
official minimum salary and number of employees.
Various business fees, joint
venture and co-production agreement
registration fees, and other costs associated with opening an office in Nizhny
Novgorod are not classified as taxes, but are levied.
Territorial Production Zones
(TPZs)
In
1994, the oblast government established “Territorial Production Zones” (TPZs) in
three former defense plants in Nizhny Novgorod, to which a fourth was later
added, that were to be municipal and regional tax free industrial zones, with
reduced federal taxes along with customs privileges.
In
1999, both Nizhny Novgorod city and regional authorities extended the
approximately 75 per cent tax
exemption period to the local budget in the four TPZs until 2005. The four Nizhny Novgorod-based defense
plants are: Petrovsky Plant, Lazur, Salyut and Elektromash.
The
TPZs are designed to attract new investment to the Nizhny Novgorod Oblast,
stimulating both Russian and foreign investors to lease space and equipment in
the TPZs. A second objective has
been to preserves workers’ jobs at the three defense enterprises by creating
employment for the various business operations, and to accelerate the conversion
from military to non-military production, thus permitting a soft entry into the
Russian market through the use of facilities and personnel that otherwise would
have been idle.
Investors in the TPZs are
offered reduced federal, regional, and municipal taxes and other benefits,
resulting in an approximate tax savings of 80 percent savings on what would
otherwise be owed. For
example, TPZ participants are granted:
n
an annual investment
investment tax credit on payments to the federal
government;
n
a five year exemption from
taxes paid to the regional and city budget;
n
a five year exemption from
profit tax, value added tax, property tax, regional road fund and part of the
excise duties paid to the oblast budget.
The
zones are designed for those producing or assembling products and are not open to trading partners.
The zones offer significant customs exemptions as well.
As
of July 1, 1999 the regional law on an imputed tax (tax on projected
revenues)
based on the Federal law
came into effect in the Nizhny Novgorod Oblast. The tax
will
be
levied, basically, from small businesses and sole proprietors. Rates of the
imputed
tax
will differentiate from such factors as area of business, location etc. As a
result,
market analysts forecast
higher prices for consumers and a surge of bankruptcies
for
local small business.
As
of July 1, 1999 a tax on projected revenues went into effect in the Nizhny
Novgorod region. It will replace a number of other taxes and duties, including
VAT, corporate profit tax and others. Local small- and medium-sized companies
which are in such businesses as retail, transportation, building/renovation,
etc. will be submitted to this tax. It will be paid once a year and will be
based on the projected revenues for the forthcoming year. The tax rate will vary
according to oblast administrative region.
Local Nizhny Novgorod tax
officials are guided by the Russian Federation Law "On Profit Taxes of
Organizations and Enterprises."
Pursuant to this Law, a profit tax (presently set at 32% of total
profits, but currently under discussion for reduction) is levied. Profit
taxpayers are companies, firms, and any other organizations set up in accordance
with legislation of foreign nations, that conduct business in the Russian
Federation through permanent representative offices (hereinafter referred to as
'foreign legal entities'). In
calculating the profits of foreign legal entities, the following aspects are
considered:
(a)
Only that portion of the foreign legal entity's profit generated as a result of
operations in the Russian Federation is subject to taxation. Profit of the
foreign legal entity is not taxed if it is made as a result of foreign trade
operations performed exclusively on behalf of the foreign legal entity and
related to the purchase of products (goods and services) in the Russian
Federation. Likewise, profit made as a result of the exchange and exportation of
products (goods and services) into the Russian Federation is also tax-free when
the legal entity becomes an owner of products (goods and services) before
crossing the border of the Russian Federation. However, profit from sales of
products out of warehouses belonging to the foreign legal entity which are
located within the territorial
boundaries of the Russian
Federation are taxable.
b)
If the foreign legal entity performs operations both in and out of the Russian
Federation, and if profits are not recorded separately, then an amount of
estimated profits will be formulated based on calculating techniques agreed to
between the taxpayer and tax officials.
c)
If it is not possible to calculate profits made by the foreign legal entity as a
result of operations in the Russian Federation, then tax authorities use 25% of
gross revenues as profits.
Other collectable taxes are
a value added tax (VAT) at 10 or 20 percent depending on type of
goods.