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A brief guide for the foreign investor in Russia

calendar 5/24/2021 8:00:00 AM
author Admin System

Every day more companies choose Russia as their operational field and their preferred market. Some of the factors that make Russia attractive for foreign corporations are a talented workforce, strong logistics, excellent commodity resources, and tax and business incentives. Being the largest country in the world, the Russian market is one of the most important worldwide and this attracts a fair amount of foreign capital and businesses.

At Mundo, we love Russia because it has developed from a heavily beaten ex-Soviet country to one of the investors' favorite markets and environments in the world in only three decades. The truth is that Dostoievsky´s country presents a quite healthy environment for both local and foreign businesses for the following reasons: 

 

1-Excellent lifestyle at a low cost 

In terms of lifestyle, Russia is one of Mundo´s favorite countries. We are talking about a country with a huge cultural offer that includes the largest art collection in Europe (the Hermitage museum), some of the best theater and ballet options (the Bolshoi and Mariinsky theatres), and some of the best philharmonics and chamber orchestras. Even in relatively small cities, you will find they have their own puppet theatre, drama theatre, opera and ballet theater, and philharmonic theatre. But there is more. Due to its large extension and relatively small population, Russia has incredible landscapes and outdoor places to enjoy including extensive forests, lakes, rivers, and even beaches, e.g., the ones you can find in the southern city of Sochi. 

The country boasts two of the most important and lively cities in Eastern Europe: Saint Petersburg and Moscow, where you can access high-speed WiFi, a wide gastronomic offer, luxury accommodation, historic buildings and places, concerts, and everything at a low cost. Compared to other cities with the same cultural level like New York, or Paris, cities in Russia have in general a much lower cost of living. This applies to entertainment, accommodation, transportation, communication services, groceries, etc. As an example, you can get a ticket to a ballet show with an excellent location at the Bolshoi Theatre (new stage) for about 27USD, while a ticket for a Broadway play costs at least 160USD. 

If you want to learn more about living in Russia, we invite you to visit an article written by one of our writers. She talks about her own experience living in Russia for two years. Read the article here.


2-Stable economy and currency 

The Russian ruble has kept a steady exchange rate for a while and inflation is under control. Moreover, the Russian Federation´s gold reserve is the fourth largest in the world after China, Japan, and Switzerland. The reserve reached an amount of $596 billion by the end of 2020.


3-Business incentives and special zones 

Like its people, Russia welcomes foreigners and their investments. Like we will discuss later in this article, foreign investors enjoy almost the same benefits and protections as Russians. The country is attractive because it is home to a variety of special economic zones from which our favorite one is Kaliningrad. This is an enclave located in Europe, which, in practical terms, means it’s a territory belonging to the Russian Federation but located in Europe. This zone offers a variety of tax and financial incentives for foreign companies and a very strategic location for a business. Because of its remarkable location and infrastructure, Kaliningrad offers easy access to Europe and China.


4-Tax incentives and other benefits 

Russia applies an income tax of 13% to foreigners who establish residency here. If we compare it to the high tax we find in Europe (in France, for example, taxes can reach a 45% rate), this is, without a doubt, an interesting option. Many wealthy people have chosen to move to Russia and optimize their taxes, like the actor Gerard Depardieu. Moreover, for the ones who want to do business, Russia offers a non-expensive and highly skilled workforce. Throughout history, Russians have demonstrated that talent is not something they lack. Lev Tolstoi, Piotr Tchaikovsky, Yuri Gagarin, Alexander Ovechkin, and Maria Sharapova are only a few examples.

Moreover, it is possible to open an account for a foreign company in Russia and the company will not be subject to tax as long as they don´t operate in the Russian Federation. This account is very useful if you want to make hassle-free transfers to Asia and the Middle East. Another advantage of banking here is that Russia does not apply US sanctions.

Now that we have established why we recommend Russia as a business center for foreigners, we present our brief guide for the foreign investor in Russia.

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Foreign investors and their rights to operate in the Russian Federation  

Contrary to what many people believe, Russia is fertile soil and a friendly environment for foreign businesses, and foreign investors have considerable freedom and protection from the local legislation. Actually, they have almost the same rights as Russian investors. Foreigners in Russia can freely acquire shares in government securities and commercial businesses, lease lands and plots, take part in privatization processes and use real estate and natural resources. These rights are all contemplated and stipulated by the Russian legislation: Federal Law No. 160-FZ of July 9th, 1999.


Taxation

All foreigners who are doing business in Russia and receiving income, even through a representative office, are subject to income tax. Companies receiving income from abroad must provide the Bank of Russia information on their investments abroad, including the ID of the foreign direct investor. The violation of such a rule is considered a violation of Russian legislation.

However, the governments of some provinces or regions provide tax incentives in order to boost investment and business. Regions like Novgorod, Tver, Saint Petersburg, Tatarstan, Yekaterinburg, and Chuvashia offer tax holidays for investors. Thus, after the investment, business people can enjoy an income tax exemption for a certain period. This strategy is implemented by these governments to encourage job creation, production, infrastructure development, and implementation of new technologies.


Restrictions

Mundo admires Russia particularly for its ability to implement a smart policy, creating the perfect balance between encouraging foreign investment and protecting the local economy. Russia´s legislation does apply some restrictions on foreign business activities in the country through a series of measures. These are some of them: 

  • Foreign investors can´t be admitted into strategic sectors of the economy. 
  • Foreign investors must be duly accredited and licensed to operate in Russia, and must always notify the state. 
  • Foreign investors can´t operate in certain areas of the local economy.
  • The state must have shares in all enterprises financed by a foreign investor. 
  • There is a special tax regime that applies to foreigners.
  • The government controls the activities carried out by foreign investors when they are related to natural resources and subsoil development. 

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Foreign investment and the banking sector  

When Russia joined the WTO in 2012, there was a change in the conditions for foreign assets in the authorized capital of local banks. Before 2016, domestic banks could have up to a 50% of foreign investment in their authorized capital, while now the percentage is only 13.44%. However, some foreign investments are not taken into account for estimating the percentage of foreign capital. The Central Bank stipulates that this capital should be calculated every year.


Diamond mining

The territories with diamond deposits are considered to be of federal interest, therefore, mining can be only carried out by duly licensed companies. One of the conditions to acquire such a license is having no more than 25% of foreign investment. The threshold was previously set to 10%, but the government raised it to 25% to encourage foreign interest in the mining industry. Although this percentage is not enough to allow foreigners to make decisions, it encourages the study of the subsoil and the development of the mineral resource industry in Russia.


Tax incentives

Tax incentives are one of the best ways to encourage the development of business in a country and so are the loans with preferential rates and guarantees. The benefits that the investor gets depend entirely on his/her share of the authorized capital, i.e., he/she will be able to access these benefits if they own at least 10% of a company. Russian companies that received the status of organizations with foreign deposits can access similar benefits. Moreover, if the company has 30% of foreign capital, it can export manufactured products without a license.


Regional benefits 

Russia is a federation formed by provinces, republics, and other self-governed territories. Thus, international investors can find specific incentives in some of these territories. Some of these may be: 

  • Benefits and guarantees. 
  • Support projects and financing options.

For these incentives, they usually use the locally assigned budget and off-budget resources. Thanks to this, Russia enjoys a variety of special economic zones such as tourism zones, IT research zones, zones for scientific projects, and industrial and port zones. 

 

Tax exemptions in Russia´s special economic zones 

Like we have stated above, all businesses established in any of the special zones can access financial benefits. They can have a reduced tax rate on profits for a period from 5 to 10 years and exemptions on property tax if the property is purchased for conducting business in the zone. Some entities in the Russian Federation offer tax exemptions on transport taxes.

Foreign businesspeople can also benefit from a land tax exemption for 5 to 10 years at a federal level if the land is located in a special zone and they can also benefit from accelerated depreciation and reduced insurance rates.


What can we do for you 

Mundo has a wide network of experts and specialists across the world and this includes Russia. We do not only have business connections with this country but also an emotional bond. Thanks to this, we have partnered with one of the most important family office experts in Saint Petersburg. He offers bank accounts, investment funds, investment deals, and wealth management. If you want to let Russia into your heart and make it the home of your business, contact our expert today. 

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