AlwaysFree: Russian Corporate Tax Use Of Special Administrative Regions Doubles in 2022

• Despite high capitalisation costs, use of Russian SARs is increasing

According to Russia Briefing's article published on October 16, 2022, increased Western sanctions have motivated Russian domestic businesses to relocate Russia’s own offshore jurisdictions in the first nine months of 2022, according to the Russian Ministry of Economic Development. 49 Russian MNCs have moved to Special Administrative Regions (SAR) of Russia, more than double the total for all of 2021.

Russian SAR are territories with a favorable tax regime for investors, and were originally created in 2018 to repatriate capital and protect Russian businesses from sanctions . There are two of them in Russia: the Oktyabrsky Islands in Kaliningrad to the West, and Russky Island in Vladivostok in the Far East. As at the end of September 2022, 107 active Russian businesses were registered in these zones, including 106 Russian MNCs and One Investment Fund.

A third manufacturing SEZ is planned for Kemerovo Oblast, in South Western Siberia, an important steel and metallurgy manufacturing base.

During 2022, there was a large increase in foreign invested Russian subsidiaries at the Russky Island SAR, while the number of employees has more than doubled, according to Pavel Sheika, director of the ATS support department at the Corporation for the Development of the Far East and the Arctic (KRDV). Now 11 international companies are registered offshore, and one more is in the process. Among the largest participants in the SAR is Interros Capital, structures of the Siberian Coal Energy Company (SUEK), and PJSC Polyus. Registration proposals from another 17 companies are also currently in the pipeline. Vladivostok provides easy regional access to China and Mongolia as well as Japan and South Korea.

In terms of Russian businesses looking to set up Offshore, the most popular jurisdiction is Cyprus, according to First Deputy Minister of Economic Development, Ilya Torosov, who has stated that “At the moment, Russia sees that the interest of companies in moving to the SAR is increasing. In this regard, work on further fine-tuning of the regulatory SAR legislation will be continued. In particular, the possibility of extending the simplified registration procedure for 2023 is currently being discussed.”

The Development Corporation of Kaliningrad has stated that since the beginning of 2022, 43 companies have registered in the Oktyabrsky SAR. They emphasized that since March there has been an active influx of new registrations. Kaliningrad is based on the Baltic Sea coast, interestingly, none of the new registrations had been previously operational in the region, suggesting alternative motivations than regional EU markets – Kaliningrad is bordered by Latvia and Poland.

The increasing use of Russian SARs is due to changes adopted in March this year, which simplified the requirements for Russian companies looking at international trade. A ‘one-stop shop’ methodology is used, with fast-track application procedures, while typically required pre-incorporation documents such as financial statements not being required.

Mostly, Russian Limited Liability Companies (LLC) move to the SAR – as the registration processes are quite fast, while for Russian listed companies it is more difficult, as it becomes necessary to include securities in one of the quotation lists of the Russian stock exchange, go through procedures to control the compliance of the company’s securities with the conditions and requirements established by the stock exchange of the Russian Federation. Therefore, the use of SAR is mostly by smaller subsidiaries of these, or privately held manufacturing and adding value businesses and especially those involved in export manufacturing. SAR participants can receive a tax rate of 5% on dividends, interest, royalties and 10% on income payments, as well as zero rates for insurance premiums.

In March, the State Duma adopted a bill on protecting businesses from sanctions, which included a number of amendments to the SAR legislation. The list of companies (by reducing age requirements) that can migrate from Foreign Jurisdictional registration and redomicile to a Russian SAR has been expanded, while the requirements for doing business in various countries to the East have been eliminated. 2022’s SAR businesses are expected to generate 1 trillion rubles (US$16 billion) of investments into Russia.

In order for foreign and Russian companies to register in the offshores of the Russian Federation as international holding companies (IHC), they must fulfil a number of conditions to qualify, but those who do can receive zero rate for income taxes on dividends received and take advantage of other state tax incentives. However, at present the capitalization costs are quite high at 50 million rubles (US$780,000) although this can be drawn down as operating expenses over time.

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