Review of Special Economic Zone Regime in Russia

Pros and Cons of the Special Economic Zone

In recent times the topic of import substitution became quite relevant. Let us look around our native land: maybe, Kaliningrad and Magadan can be a worthy replacement of traditional tax heavens like Cyprus and Malta?

The key principles for organization of the special economic zone (hereinafter - the SEZ) are common for the countries of the Customs Union . The main privilege, which residents of the SEZ enjoy, lies in the opportunity to apply customs procedures of the free customs zone (hereinafter - the FCZ) to goods imported to the territory of the SEZ . At application of the said procedure, goods are placed and used within the territory of the SEZ free of customs duties and levies. But these pros are complemented by material cons. Customs procedure of the FCZ applies only to those goods, which are designated for the performance by residents of business activity in accordance with the agreement on operation in the territory of the SEZ. It means that only limited range of goods can be imported free of duty and VAT.

Goods may stay under the customs procedure of the free customs zone within the operation term of the SEZ, except cases when the party, which placed goods under the customs procedure of the FCZ, loses the status of resident.

The operation of the customs procedure of the FCZ ends upon export of applicable goods from the territory of the SEZ or upon transfer of the right of ownership for goods to non-resident of the SEZ. At completion of the customs procedures of the FCZ, goods placed under such procedure, and also their derivatives are placed under other customs procedures depending on the status of goods. Goods produced using foreign goods shall be recognized as goods of the customs union if they comply with one of the criteria of substantial processing of goods, namely:

• the classification code of goods under the unified Commodity Classifier for foreign economic activity of the customs union has been amended at the level of any of the first 4 digits;
• the cost of goods has been amended when the percentage of cost of used materials or added value reaches fixed share in the cost of final product (the rule of ad valorem share);
• in respect of goods terms and production and technological operations required for recognition of goods made (produced) using foreign goods placed under the customs procedure of the free customs zone as the goods of the customs union has been fulfilled.

The requirement to pay taxes and customs duties upon completion of the customs regime of the FCZ depends on the status of goods. This dependence is shown in fig. 1.



In Russia there are 4 types of the SEZ, decision on the creation whereof is made by the Government of the Russian Federation:

1. Industrial and production SEZ;
2. Technological development SEZ;
3. Tourism and recreation SEZ;
4. Port SEZ.

Kaliningrad and Magadan SEZ created under federal laws stand out among the rest.

The status of the resident of the SEZ is also attractive for its tax reliefs, to which it entitles. The precise volume of such reliefs depends on the type of the SEZ and the subject of the Russian Federation where it is located. However, the Tax Code of the Russian Federation stipulates a list of reliefs common for all types of the SEZ:

• reduced profit tax rate payable to the budget of subjects of the Russian Federation shall not exceed 13.5%;
• exemption of tax on property located in the territory of the SEZ created or acquired for operation under the agreement for the creation of the SEZ;
• exemption of land tax in respect of land plots located in the territory of the SEZ for 5 years from the moment of accrual of the right of ownership for the land plot.

Let us further consider additional reliefs provided depending on the type of zones.

Industrial and production SEZ:

• residents of these zones are entitled to apply accelerated depreciation defining multiplying ratio to main funds, but not exceeding 2.

Technical development SEZ:

• until 2018 profit tax rate payable to the federal budget shall equal 0%;
• reduced rates on insurance contributions payable by employers to the Pension Fund of the Russian Federation and the Social Insurance Fund of the Russian Federation are valid until 2019.

Tourism and recreation SEZ:

• for SEZ residents unified under the decision of the Government of the Russian Federation into a cluster, profit tax rate payable to the federal budget shall equal 0%;
• for SEZ residents unified under the decision of the Government of the Russian Federation into a cluster, reduced rates on insurance contributions payable by employers to the Pension Fund of the Russian Federation and the Social Insurance Fund of the Russian Federation are valid until 2019.

Port SEZ:

• exemption of VAT payment for rendering services (work performance).

Who can actually use reliefs waiting in the SEZ? A private entrepreneur or commercial organization, which executed agreement for the performance of business activity with SEZ authorities, is recognized as the SEZ resident. These subjects of economic activity should be registered in the territory of the SEZ; the organization should have no branches or representative offices outside such SEZ. The standard form of the agreement for residents of Russian SEZ is determined by the Ministry for Economic Development of the Russian Federation and is not subject to any revisions as a result of negotiations. The main liability of the resident stipulated in the agreement is investment, including capital contributions:

• for industrial and production SEZ: within the first 3 years – not less than 40 mln Rubles, during the upcoming years of the agreement term – not less than 80 mln Rubles;
• for technological development SEZ: the minimum amount is not determined;
• for tourism and recreation SEZ: the minimum amount is not determined;
• for port SEZ: within the first 3 years – not less than 40 mln Rubles, during the upcoming years of the agreement term – not less than 360 mln Rubles.

SEZ resident is entitled to perform only activity specified in the agreement. Failure to comply with such prohibition, and also failure to perform obligations of the investor shall be deemed a material breach of agreement terms, which constitutes the ground for its early termination.

Tax and customs control of SEZ residents is carried out following general procedures. But their situation is complicated by the fact that 2 or more material breaches of tax and (or) customs law may entail withdrawal of resident status under the court decision. A party, which lost resident status due to early termination of the agreement, shall pay penalty in the amount of 5% of the investment amount specified in the agreement, save for investments made as of the date of withdrawal of the resident status, but no more than 5 mln Rubles and not less than 150,000 Rubles.

Summarizing the foregoing, it should be noted that prior filing an application for the execution of the agreement for operation in SEZ thoroughly evaluates its pros and cons.