The Kaliningrad Special economic zone represents one of the best investment opportunities in Russia today with very low labor tax, reduced profit tax and sometimes full exemption and multiple start up opportunities in Russia’s gateway to Europe.

This platform for entrepreneurship appeared in 2018, and it aimed to create a fiscal haven to promote the return of capital to Russia. However, the legislation in Russia is not discriminatory, so the same conditions designed to draw back Russian capital apply to foreign companies wishing to enter the jurisdiction of these special administrative regions.

Some mistakes made during Russia's transition from a communist to a market economy during the last decade of the 20th century led the most significant Russian companies down the path of complex offshore schemes. The jurisdictions of the UK, USA, and the island of Cyprus were the preferred ones for Russian business. 

The pressure that emerged in recent years on these jurisdictions began to generate problems in large Russian companies and, as a result, difficulties in the country's economy. Responding to this challenge, Russia has met with the companies and provided opportunities to return to the Russian jurisdiction ensuring the preservation of those benefits and business conditions presented by offshore companies.

The first residents of special administrative areas were the companies benefiting from the aluminum giant En+group, whose turnover is USD 15 300 000 000. According to experts, by moving from the Island of Jersey to the jurisdiction of the Kaliningrad Special Administrative Region, En+group improved its profitability by achieving lower tax rates.

According to the legislation in force, two types of structures can operate in the Russian special administrative regions:

• Commercial companies previously operating abroad, credit organizations, non-credit financial organizations, payment system operators and payment infrastructure service operators.

• Funds created for the ownership and management of assets or social functions of a non-profit nature.

Trading companies obtain the status of international companies and are given preferential tax treatment. These companies are taxed 0 % on income in the form of dividends, provided that on the day the payment is executed, it has held these dividends for one year and has at least 15% of the deposit in the share capital of the organization that pays the dividends or has deposit receipts that qualify for them.

Also, these businesses are taxed 5% on income received by foreign persons from shares of international holdings, which, on the date of payment of dividends, are public companies. Besides, residents of the Special Administrative Regions are not subject to taxation on profits earned outside Russia or to tax on transactions involving shares or equity interests in Russian or foreign organizations.

Only companies that have been registered before 01/01/2018 in a FATF adherent state or a member of the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism, and that have begun operating by 1 January 2017, may exercise their right to the status of residents of the special administrative regions. Re-domiciliation and then incorporation is obtained when the resident status is given. The additional requirements include the presence of a division in Russia, through which investments of a total of 50 million rubles (approximately USD 800 000) are made in the Russian economy over six months.

At the moment, the conditions for entering the special administrative zones are quite demanding. Still, the Ministry of Economy, in cooperation with foreign and Russian companies, has already prepared three packages of amendments to the legislation to liberalize the requirements and increase the competitiveness of the special administrative areas.

For example, amendments have already been adopted, allowing residents of the special administrative regions not to disclose to third parties data about beneficiaries or persons controlling companies. Only the administration company of the Special Administrative Region, the control bodies of the Russian Federation, and the courts may obtain such information. Resident companies are exempt from exchange control and may maintain the par value of their shares in foreign currency and pay dividends following international financial reporting standards (IFRS).

The geography of the jurisdictions from which re-domiciliation can take place through the countries of the Caribbean Anti-Money Laundering Task Force (CFATF) has been expanded. These countries include the British Virgin Islands (BVI), St. Kitts and Nevis, and the Cayman Islands. After their re-domiciliation process, the companies have had the opportunity to return to the protection of corporate law in the Russian jurisdiction and have gained the possibility to resolve legal and commercial disputes in international arbitration courts.

As for the second form of residence, international funds, unfortunately, little is known yet, since the law on its registration procedure was adopted on 25 November. According to the text of the law, the book value of the assets of the fund's creator, including those abroad, must be at least 500 million rubles (USD 8 000 000). The founders of the fund cannot be members of it or have membership rights.

Nonetheless, they can be commercial companies resident in special administrative areas, and existing funds in order of incorporation. The funds will not be obliged to report publicly on their activities. Ownership and management of assets will not be considered a business activity. For the time being, it is known that the Russian giant Yandex, a leader in the development and implementation of artificial intelligence and unscrewed transport, has expressed its desire to take advantage of this opportunity and register in the Special Administrative Region.

We can see that, at the moment, the Russian offshore companies are still forming their base. Still, even at this initial stage they already have certain competitive advantages, the main one being that their aim is not to obtain occasional income, but that they are created to solve problems in the real sector of the Russian economy. This connection is a guarantee of their sustainability against the influence of the international situation.

Special administrative regions are created in Russia in two areas. On the island of Oktyabrsky in the westernmost part of Russia, the Kaliningrad region, and on the eastern outskirts of Russia, the island of Russky in the Primorsky territory. It should be noted that Oktyabrsky Island is closer to Warsaw and Berlin than to Moscow, and the distance from Russky Island to Seoul, Tokyo, or Hong Kong is ten times less than to the Russian capital. In both cases, you should not be concerned about the word "island".

Both Russky Island and Oktyabrsky Island are located in Russian cities with well-developed transport and urban infrastructure, Vladivostok and Kaliningrad are separated from the mainland by very small straits crossed by road traffic bridges. On Russky Island we can find the campuses and buildings of the Far East University. Oktyabrsky Island is a booming urban area where we can find the football stadium that hosted the FIFA World Cup.

The territories of the special administrative regions coincide with other platforms for entrepreneurship. Russky Island is part of the territory of the Vladivostok free port, and Oktyabrsky Island is part of a special economic zone. Moreover, residents of the special administrative regions can carry out activities on the territory of Russia and take advantage of the benefits provided by the special economic zones to invest in the real sector of the economy.

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Special economic regimes in Russia include:

• Special Economic Zones (SEZ) - are growing industrial, technology, logistics and touristic territories with special benefits and incentives for investors. There are 32 SEZ in Russia which are regulated by single Federal law (conditions are nearly the same). Kaliningrad SEZ is unique – it is regulated by local authorities. Thus, conditions are more beneficial.

• Priority development areas are created to accelerate economic development of local territories for improvement of life of the local population in the Russian Far East. There are 18 Priority development areas in Russia.

• Priority social and economic development (PSED) areas are created to accelerate economic development of local territories for improvement of life of the local population in Russia (other than Far East).

Kaliningrad special economic zones

From all the special economic zones in Russia, Mundo recommends the Kaliningrad region special zone, because it offers unique advantages for tax optimization, especial incentives on import and export activities and unique transportation opportunities. The Kaliningrad province is a Russian enclave located in Europe, bordered by Poland to the south, Lithuania to the north and east, and the Baltic Sea to the west.

This region has access to the Baltic sea and the waters don’t freeze during the winter, thanks to which the traffic of products and commerce can continue throughout the whole year. The Kaliningrad province is part of the Russian Federation, but it is actually located in Europe, which gives it unique transportation advantages not only across Europe but also to Asia. In this section we describe the advantages of the special zone in the Kaliningrad region and present a helpful comparison chart that will help you to compare different special zones of the Russian Federation.

Preferential economic regimes of the Kaliningrad region

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Special economic zone

• Reduced social contribution tax* from federal rate of 30.2% to 7.6%. Thus, the savings on social contributions paid by companies on its employees will amount to 22.6% of the gross salary of all workers in the Kaliningrad region
• 0% profit tax first 9 years, next 6 years - 10%, after - 20%
• 0% property tax first 6 years, next 6 years - 1.1%, after - 2.2%
• 0% land tax first 5 years, after - 1.5%
• Guarantees of the invariability of the aggregate tax burden and the land rental rate at the state level

The only condition to obtain the status of SEZ resident is the amount of investments (in the form of capital expenditures) which should be made within 3 years starting from the date of obtaining SEZ residency. Required investments are the following: $ 15 000 for companies in IT and R&D sectors; $ 150 000 for healthcare, medical production and health services; $ 750 000 for production, agriculture and tourism sectors; $ 2 300 000 for other industries.

The Kaliningrad region SEZ has no territorial constraints (unlike all other SEZ`s) – it operates on the territory of the entire region, without any reference to a specific location.

Unlike all other SEZ`s in Russia, the Kaliningrad region SEZ is regulated by local authorities, therefore the benefits provided by our SEZ are more advantageous and differ from the benefits that other SEZ`s offer.

(*) – one of the largest taxes for business in Russia is social contributions tax. The tax rate amounts to 30,2% and is paid by the employer from the gross salary of workers

Free trade zone

The Free Trade Zone regime implies 0% import duty and 0% import VAT on all goods, components, raw materials entering Kaliningrad from any part of the world with no restriction on the volume of import. It means that:

• There will be no customs duties and import VAT on all imported equipment for the new business (plant, office, etc.). Savings on equipment will be up to 25%
• if goods are produced and consumed in the Kaliningrad region, no import VAT and import duties should be paid
• if goods are produced in the Kaliningrad region and exported abroad, no import VAT or import duties should be paid
• if goods are produced locally* in the Kaliningrad region and shipped to Russia, then 85% of the customs duties on imported components of the final products will be reimbursed. VAT should also be paid, but there is a 180-days grace period of VAT payment.

Local production implies: +30% of value added and change of the last 4 digits of EAEU Commodity Nomenclature of Foreign Economic Activity

Logistics

Kaliningrad has well-developed logistics and transport infrastructure which offers unique opportunities for the development of transit and export projects through the:

• Presence of an ice-free port in the Baltic with the total length of berths over 17 km
• Presence of two railway track types - wide-track (EAEU countries) and narrow-gauge (European)
• Presence of the direct railway route from Kaliningrad to China which takes only 9 days to deliver cargo containers from Chongqing to Kaliningrad (the final destination is at Germany`s Duisburg). The basic rate for a railway container (2 TEU or 40 feet) on a route from China to Kaliningrad is 4500 US dollars per 1 container, on a route from Kaliningrad to Kazakhstan (Dostyk / Altynkol) is 2600 US dollars. However, discounts on take-or-pay contracts reach 70%. Cargo transportation at the Kaliningrad - China section of the route is partially subsidized under the federal export development program (up to 80% of logistics costs could be compensated)

Thus, the Kaliningrad region is an optimal location for production from imported components in order to supply products to Russia and for export.

Comparison of benefits offered by Kaliningrad region Special economic zone (SEZ) and other special economic regimes available in Russia.

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(*) – one of the largest taxes for business in Russia is social contributions tax. The tax rate amounts to 30.2% and is paid by the employer from the gross salary of workers

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Kaliningrad region labor market

• Average salary is 350 EUR per month.
• Program for relocation of qualified personnel. This regional program implies compensation up to 3 000 EUR in the form of a subsidy and 3 000 EUR as a down payment on the mortgage for an employee.

Infrastructure

• Average price for electricity - 0.04 EUR/kWh.
• There are 6 industrial parks with ready-made infrastructure in the region 

Example: the rental rate for 1 ha of land per year in the Khrabrovo industrial park is around 1750 EUR. The price already includes connection to the electric network (0.18 MW), connection to utilities (gas water supply, sewage); land and property taxes; costs associated with the maintenance of infrastructure. The price of the land after commissioning of production is 31 500 EUR per 1 hectare.

Electronic visa regime

Russia is generally on good terms with many countries, which don’t require a visa to enter the Russian Federation. In these cases, visitors can stay in the country for 90 days, after which they have to leave. If they want to come back to the country as regular visitors, they will have to wait three months before entering again or apply for a different kind of visa such as studies, business, visitors. 

Some countries, however, like countries of the European Union or the United States, do need a visa to enter the country. For them it is possible to acquire an electronic visa through internet in a very simple way.

Citizens of 53 foreign states can get an electronic visa to the Kaliningrad region. It is issued within 4 calendar days, free of charge (no hidden fees). No invitations or confirmations are required, you only need to fill out an application on the website of the consular department of Russia`s Ministry of Foreign Affairs and attach a photo. Electronic visas are issued for the period of 30 days and allow staying on the territory of the Kaliningrad region up to 8 days starting from the date of entry.

If you want to extend your stay, therefore apply for a different visa, you will be required to leave the country and to ask for this new visa outside of Russia. 

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Requirements for registering in Kaliningrad special economic zone

Depending on the industry and area of business, Kaliningrad sets the minimum investment requirements to register in the special zones. The good news is that the investment doesn’t necessarily have to be made altogether upon registration. The investment can be made through a three-year period after the company has been registered in Kaliningrad special economic zone. 

The minimum investment requirements are: 

IT, web-media, R&D: development of software, information technology, research and development.

Minimum investment: 15,000 USD

Healthcare: health services

Minimum investment: 150,000 USD

Manufacturing, agriculture, tourism: production manufacturing, fishery fish farming, agriculture, recreational activities, tourism.

Minimum investment: 750,000 USD 

Other industries

Minimum investment: 2.3 million USD

Registration process:

Requirements for legal entities:

• Organization registered in the Kaliningrad region
• Investments done in the Kaliningrad region
• Goods produced in the Kaliningrad region
• General system of taxation applied

Registration of the legal entity in three steps. To be carried out on the territory of Kaliningrad

• Submit the documents. Includes the organization into the unified register of SEZ residents.
• Application processing
• Time-limit for acquiring residential status: 30 days

About Kaliningrad

The area of Kaliningrad was originally formed as a result of the victory of the Soviet Union over Germany in world war II, at the time, one third of the territory of east Prussia became part of the Soviet Union and in 1946 the territory was renamed “Kaliningrad”.

This province has an area of 15,100 km2 and a population of almost 1 million people. The main cities are Sovetsk, with 40 thousand people, Chernayakhovsk, with 37 thousand people, Baltyisk, with 36 thousand people, Gusev, with 28 thousand people and Svetlogost, with 22 thousand people. 

Kaliningrad, like all Russia, surprises us with astonishing beautiful landscapes. In Kaliningrad we can find the Curonian Spit peninsula with dunes up to 70 meters high covered by forests.

This spot is particularly important for the region in many levels. Its unique biodiversity contributes to the wellbeing of the ecosystem and the peninsula contributes to the touristic sector of Kaliningrad. The Curonian Spit offers a combination of natural and cultural heritage which is a very typical combination in Russia.

But this is not the only attractive landscape we can find in this province. The Baltic Spit is connected to the mainland in Poland, but the Kaliningrad bay is located off the southern coast of the Baltic Sea. The river which flows into the Kaliningrad Bay is called Pregolya. One important fact, which we have mentioned before, is that the bay does not freeze during the winter, which allows for the trading to continue throughout all seasons. 

What does freeze is the Curonian lagoon, located on the southeastern coast of the Baltic Sea and it´s connected to the sea through a narrow strait. This lagoon is 7 meters deep and 93 kilometers long. 

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