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Greenfield project in North

West of Russia
T
Dmitri Babiner
Partner, Head of Tax & Legal Practice, St. Petersburg office
Dmitri Babiner
Partner, Head of Tax & Legal Practice, St. Petersburg office
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Greenfield Project
Greenfield Project
STRUCTURING WORK
Investment Incentives
Project Financing
Customs planning
Foreign Labor
LEGAL WORK
Land
Access to utilities / infrastructure
Construction
Supply & distribution
Intellectual property
OUR EXPERIENCE
STRUCTURING WORK
Investment Incentives
Project Financing
Customs planning
Foreign Labor
LEGAL WORK
Land
Access to utilities / infrastructure
Construction
Supply & distribution
Intellectual property
OUR EXPERIENCE
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Major Tax Implications
Major Tax Implications
Tax Concessions in St. Petersburg still a draft law
Project financing
Allocation of costs incurred by foreign company for the project in
Russia (before and after Russian legal entity is set-up), inter alia
- design and project documentation costs
- infrastructure / civil works costs
- management fees
Value of contribution in-kind for tax purposes
Input VAT on construction expenses bona fide qualification
Sales structure
Structuring of foreign labor in Russia
Tax Concessions in St. Petersburg still a draft law
Project financing
Allocation of costs incurred by foreign company for the project in
Russia (before and after Russian legal entity is set-up), inter alia
- design and project documentation costs
- infrastructure / civil works costs
- management fees
Value of contribution in-kind for tax purposes
Input VAT on construction expenses bona fide qualification
Sales structure
Structuring of foreign labor in Russia
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Investment Based Concessions
Investment Based Concessions
Tax rate:
- reduced from 24% to 20%
(for investments over RUR
3bln)
Period: 5 years after the
plant is put into operation
Tax rate:
- reduced from 24% to 20% (for
investments over RUR 300ml)
-reduced from 24% to 22% (for
investments over RUR 150ml)
Period: 3 years after the plant
is put into operation
Tax rate: reduced from 2.2%
to 0 (for investments over
RUR 3bln)
Period: 5 years after the
plant is put into operation
Proposed
Leningrad Region St. Petersburg
YES (feasibility study should
be verified by an accredited
consulting company)
NO (though practically Investment Agreement is required for
large investment projects)
Agreement with
authorities
In lieu of tax refund
(though unrealistic in
practice)
NO Subventions
Depends on tax rules of
particular municipality
NO (abolished from 1 January 2006) Land Tax
Tax rate: reduced from
2.2% to 0%
Period: payback period + 2
years
Tax rate: reduced from 2.2% to
1.1% (for investments over
RUR 150ml)
Period: 3 years after the plant
is put into operation
Property tax
Tax rate: reduced from
24% to 20%
Period: payback period + 2
years
Effective Profits tax
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Project Financing - Overview
Project Financing - Overview
Cash contributions to the charter capital
Gratuitous transfer: mind tax implications and Russian
civil law restrictions
Inter-company loans: arms length principle and thin
capitalization rules
In-kind contribution of equipment: customs VAT and
duties exemption
Leasing: weigh benefits against drawbacks
Cash contributions to the charter capital
Gratuitous transfer: mind tax implications and Russian
civil law restrictions
Inter-company loans: arms length principle and thin
capitalization rules
In-kind contribution of equipment: customs VAT and
duties exemption
Leasing: weigh benefits against drawbacks
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Project Financing. Cash in-flow
Project Financing. Cash in-flow
Cash contributions to the charter capital. Feasible and
quick process in LLC form.
Inter-company loans:
arms length principle
thin capitalization rules
currency control implications
Gratuitous transfer. Will not be taxed in Russia if
provided by major shareholder. Donations between
commercial organizations are restricted by Russian
civil law rules.
Cash contributions to the charter capital. Feasible and
quick process in LLC form.
Inter-company loans:
arms length principle
thin capitalization rules
currency control implications
Gratuitous transfer. Will not be taxed in Russia if
provided by major shareholder. Donations between
commercial organizations are restricted by Russian
civil law rules.
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Project Financing: Equipment (overview)
Project Financing: Equipment (overview)
In-kind charter capital contribution:
exemption from VAT and customs duty
(very often and mostly used mechanism)
Leasing: benefits against drawbacks
In-kind charter capital contribution:
exemption from VAT and customs duty
(very often and mostly used mechanism)
Leasing: benefits against drawbacks
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Project Financing. In-kind Contribution.
Project Financing. In-kind Contribution.
Classification decisions with the State Customs
Service (likely required)
Independent appraisal of the property to be
contributed
Corporate actions and registration formalities
associated with increase of the charter capital
VAT exemption approval by the State Customs
Classification decisions with the State Customs
Service (likely required)
Independent appraisal of the property to be
contributed
Corporate actions and registration formalities
associated with increase of the charter capital
VAT exemption approval by the State Customs
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Project Financing:
Importing Equipment In-kind
Project Financing:
Importing Equipment In-kind
Strengths:
Import VAT exemption
(for designated technological
equipment);
Customs duty exemption
(for fixed production assets).
Strengths:
Import VAT exemption
(for designated technological
equipment);
Customs duty exemption
(for fixed production assets).
Weaknesses:
Some items may not qualify
Claw back provisions
Time-consuming
No accelerated depreciation
available
Weaknesses:
Some items may not qualify
Claw back provisions
Time-consuming
No accelerated depreciation
available
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Project Financing:
Cross-border leasing
Project Financing:
Cross-border leasing
Strengths:
Full deductibility of lease
payments
Withholding tax exemption for
lease payment under most
double tax treaties
Temporary import VAT and
customs duty payments by
installments for 34 months (no
interest charged; the sum
fixed in rubles)
Strengths:
Full deductibility of lease
payments
Withholding tax exemption for
lease payment under most
double tax treaties
Temporary import VAT and
customs duty payments by
installments for 34 months (no
interest charged; the sum
fixed in rubles)
Weaknesses:
Issues with customs VAT
recovery if paid by non-
registered foreign lessor
Double VAT hit: customs VAT
+ VAT reverse charge on
lease payments
Weaknesses:
Issues with customs VAT
recovery if paid by non-
registered foreign lessor
Double VAT hit: customs VAT
+ VAT reverse charge on
lease payments
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Foreign Labor
Foreign Labor
Management Agreement
- PE exposure
Secondment Agreement (widely used in
practice)
- no PE exposure
- work permit issue
Local Employment
- supplement tax payment (unified social tax)
Dual employment
Management Agreement
- PE exposure
Secondment Agreement (widely used in
practice)
- no PE exposure
- work permit issue
Local Employment
- supplement tax payment (unified social tax)
Dual employment
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Land. Availability of Land Plots
Land. Availability of Land Plots
Depending on the size of the plot needed:
Within St. Petersburg boundaries
In the Leningrad Region
Directly from the state (local authorities)
From private owners
Depending on the size of the plot needed:
Within St. Petersburg boundaries
In the Leningrad Region
Directly from the state (local authorities)
From private owners
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Land issues. Greenfield : Main
Implications
Land issues. Greenfield : Main
Implications
Land category appropriate for production?
Sanitary zone and environmental approvals.
Increased complexity of approving with sanitary
authorities
Legal restrictions and procedures associated
with obtaining rights to the land plot
Infrastructure / access to utilities
Land category appropriate for production?
Sanitary zone and environmental approvals.
Increased complexity of approving with sanitary
authorities
Legal restrictions and procedures associated
with obtaining rights to the land plot
Infrastructure / access to utilities
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Obtaining Rights to the Land Plot
(Greenfield)
Obtaining Rights to the Land Plot
(Greenfield)
Auction alternative not practical
With prior approval of the production location:
Apply to the authorities (in St. Petersburg Investment
Department)
Respective approvals (Investment Department in St. Petersburg,
MVK in Leningrad oblast)
Act on site selection
Decision on location (in St. Petersburg to be taken by SPb
Government on provision of the land plot, in LO preliminary
approval of location)
Site boundaries and cadastre plan
Leasehold rights, Investment Agreement
Auction alternative not practical
With prior approval of the production location:
Apply to the authorities (in St. Petersburg Investment
Department)
Respective approvals (Investment Department in St. Petersburg,
MVK in Leningrad oblast)
Act on site selection
Decision on location (in St. Petersburg to be taken by SPb
Government on provision of the land plot, in LO preliminary
approval of location)
Site boundaries and cadastre plan
Leasehold rights, Investment Agreement
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Ownership to Land
Ownership to Land
PROS
Greater independence from
the state;
Land tax is more stable than
rent payments;
Increase of investments
liquidity;
Current buy-out price is
relatively low;
The price may grow.
PROS
Greater independence from
the state;
Land tax is more stable than
rent payments;
Increase of investments
liquidity;
Current buy-out price is
relatively low;
The price may grow.
CONS
Possible only after completion
of the construction and
registration of the real estate;
Rent is deductible;
Land plots can not be
depreciated;
Rent could be comparable to
land tax.
CONS
Possible only after completion
of the construction and
registration of the real estate;
Rent is deductible;
Land plots can not be
depreciated;
Rent could be comparable to
land tax.
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Utilities: Contracts
Utilities: Contracts
Utilities (electricity, gas, water) are provided by
monopolists
Expect severe connection costs
Negotiations of contracts are possible, but very
difficult. Start negotiations at the very
beginning
Lenenergo is much more difficult to negotiate
with
Utilities (electricity, gas, water) are provided by
monopolists
Expect severe connection costs
Negotiations of contracts are possible, but very
difficult. Start negotiations at the very
beginning
Lenenergo is much more difficult to negotiate
with
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Gas: Main Stages
Gas: Main Stages
Gas limits approval
Permission for usage of gas as fuel
Gas Supply Agreement
Technical Conditions for Gas Connection
Gas Transportation Agreement (if any)
Gas limits approval
Permission for usage of gas as fuel
Gas Supply Agreement
Technical Conditions for Gas Connection
Gas Transportation Agreement (if any)
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Construction Stages (high level)
Construction Stages (high level)
Organizing selection and liaison with building
contractors
Construction permit
Relations with utility providers:
Ensure accessibility of utilities at the selected site
Commencement of the project
Organizing selection and liaison with building
contractors
Construction permit
Relations with utility providers:
Ensure accessibility of utilities at the selected site
Commencement of the project
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Intellectual Property
Intellectual Property
Patent / trademark / domain name registration
Examination / drafting / registration of license and
franchising agreements
Development of intellectual property / copyright
protection system:
- Inter-company Regulations on commercial secrets;
- Related labor agreements / job descriptions
Royalties taxation issues
Patent / trademark / domain name registration
Examination / drafting / registration of license and
franchising agreements
Development of intellectual property / copyright
protection system:
- Inter-company Regulations on commercial secrets;
- Related labor agreements / job descriptions
Royalties taxation issues
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Ernst & Young Services
Ernst & Young Services
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St.Petersburg & Leningrad Region
Our Experience
St.Petersburg & Leningrad Region
Our Experience
Selected projects: Japan Tobacco International, Vena Brewery, Baltika Brewery, Gillette,
Coca-Cola, Rocco Forte, Moller / Maersk; International Paper/OAO Svetogorsk, Merloni, Philip
Morris, British American Tobacco, Cres Neva, Rockwool
Full scope legal and tax support with investment structuring and overall project start-up;
Assistance in obtaining customs and tax concessions on in-kind contribution;
Allocation of land plot for development and assistance with land plot buy-out;
Registration of a license agreement between a Russian legal entity and a foreign owner with the Russian patent
authorities;
Development of manufacturing facilities;
Structuring investment activities and coordination of all necessary steps with relevant state authorities (including, the
currency control issues, taxation of cross-border transactions, legal support in establishing of new legal entities, etc.);
Structuring cost sharing agreements with Lenenergo to ensure energy infrastructure functionality;
Analysis of risks related to the currency regulation and corporate requirements;
Assistance in maintaining loan/credit relations to hedge potential risks of devaluation of the ruble assets of the client;
Customs planning;
Full scope assistance with management of real estate issues.
Selected projects: Japan Tobacco International, Vena Brewery, Baltika Brewery, Gillette,
Coca-Cola, Rocco Forte, Moller / Maersk; International Paper/OAO Svetogorsk, Merloni, Philip
Morris, British American Tobacco, Cres Neva, Rockwool
Full scope legal and tax support with investment structuring and overall project start-up;
Assistance in obtaining customs and tax concessions on in-kind contribution;
Allocation of land plot for development and assistance with land plot buy-out;
Registration of a license agreement between a Russian legal entity and a foreign owner with the Russian patent
authorities;
Development of manufacturing facilities;
Structuring investment activities and coordination of all necessary steps with relevant state authorities (including, the
currency control issues, taxation of cross-border transactions, legal support in establishing of new legal entities, etc.);
Structuring cost sharing agreements with Lenenergo to ensure energy infrastructure functionality;
Analysis of risks related to the currency regulation and corporate requirements;
Assistance in maintaining loan/credit relations to hedge potential risks of devaluation of the ruble assets of the client;
Customs planning;
Full scope assistance with management of real estate issues.
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St.Petersburg & Leningrad Region
Our Experience
St.Petersburg & Leningrad Region
Our Experience
Close cooperation with the regional authorities
Established practical relationship with Region
Administrations and municipalities
Ernst & Young authorized consulting company
permitted to sign off on investment documents of
applicants
Vast experience in negotiating tax concessions for
brownfield and greenfield projects
Developed real estate practice
Introduction of novelties in investment legislation
Close cooperation with the regional authorities
Established practical relationship with Region
Administrations and municipalities
Ernst & Young authorized consulting company
permitted to sign off on investment documents of
applicants
Vast experience in negotiating tax concessions for
brownfield and greenfield projects
Developed real estate practice
Introduction of novelties in investment legislation
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Ernst & Young Team
Dmitry is the Head of Tax & Legal Practice in St. Petersburg.
He has participated in the largest projects in telecommunications, food
processing and manufacturing during his 9-year tax and legal work
experience. He has been widely involved in tax and customs planning,
complex analysis of inter-related legal, tax and accounting risks in the
process of mergers and acquisition of the legal entities. He also specializes
in comprehensive tax and customs studies on tax optimization of cross-
border transactions. He has extensive experience in tax dispute resolution
and successful tax litigation.
Dmitry is a member of the Executive Committee of SPIBA (St. Petersburg
International Business Association for Northwest of Russia).
Dmitry has advised the following companies: International Paper, Toyota,
Gillette, Cadbury, Amcor, Swedwood, Quadriga Investment Fund, Gazprom-
Media, Sviazinvest.
Dmitri Babiner
Partner, Head of Tax &
Legal Practice in
St. Petersburg
+ 7 812 703 78 39
Dmitri.Babiner@ru.ey.com
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Ernst & Young Team
Galina Dontsova has approximately 13 years experience in the
customs area, including: due diligence of clients customs
operations; application of different customs regimes, such as
temporary import, customs bonded warehouse, processing of
goods under customs control etc.; application of customs
privileges and exemptions, including exemptions granted for
foreign investors; refund of customs deposits; negotiation with
customs authorities during customs audits; monitoring Russian
and CIS legislation developments in customs area; research on
specific customs problems, especially investigation of ambiguous
and inconsistent issues.
Galina is a member of the Advisory Council on realization of
customs policy attached to the Federal Customs Services.
1998 to present Ernst & Young, Moscow, Senior Manager.
1992 to 1998 The State Customs Committee of the Russian
Federation: Specialist, Senior Specialist, Head of the International
Law Department.
Galina Dontsova
Senior Manager,
Head of Customs Group, Russia
+ 7 495 938 66 63
Galina.Dontsova@ru.ey.com
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Ernst & Young Team
Dmitry is a Tax manager with Ernst & Young, specializing in Customs.
Dmitry graduated from the Russian State Customs Academy and served in
the St. Petersburg Customs Office for 8 years. He is currently one of the
most experienced customs consultants in the Northwest region of Russia.
Dmitry advises our Russian and multinational clients on various complex
customs-related matters, including which customs regime to choose, how to
proceed with customs valuation and structure export-import operations and
in-kind contributions.
Dmitri Mayorov
Manager, Customs
+ 7 812 703 78 27
Dmitry.Mayorov@ru.ey.com
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Ernst & Youngs Credentials
Ernst & Youngs Credentials
The experience of Ernst & Young customs team specialists is applied for
development and improvement of the Russian customs law. This task is performed
by our specialists through participation in:
A range of the RF State Duma Parliamentary committees on development of a new
RF Customs code and of the laws on free zones
The RF Governmental Advisory Committee for foreign investment
The American Chamber of Commerce
The Association of European Business in Russia
The workgroup of the Russian Union of Industrialists and Entrepreneurs on
accession of Russia to the WTO and on the customs policy reforms
The Advisory Council for implementation of the customs policy attached to the FCS
of Russia
The recent major clients of our Customs Group include in particular:
The experience of Ernst & Young customs team specialists is applied for
development and improvement of the Russian customs law. This task is performed
by our specialists through participation in:
A range of the RF State Duma Parliamentary committees on development of a new
RF Customs code and of the laws on free zones
The RF Governmental Advisory Committee for foreign investment
The American Chamber of Commerce
The Association of European Business in Russia
The workgroup of the Russian Union of Industrialists and Entrepreneurs on
accession of Russia to the WTO and on the customs policy reforms
The Advisory Council for implementation of the customs policy attached to the FCS
of Russia
The recent major clients of our Customs Group include in particular:
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Ernst & Youngs Automotive Credentials
Our Automotive Qualifications in Russia and the CIS
Ernst & Youngs Automotive Credentials
Our Automotive Qualifications in Russia and the CIS
In Russia as in the rest of the world, Ernst & Young has a strong team of automotive
specialists. Ernst & Young provides its automotive clients with audit and assurance
services; advises them in corporate and personal tax matters; offers financial solutions
and due diligence services; and provides valuable market insight and business
development strategies to make a success of operations in the CIS. Our key
competence areas include detailed market research and forecasts; feasibility studies;
assistance in finding a suitable business partner; business and expansion plan design;
and tax customs and VAT review planning.
Foreign Automotive Clients in Russia and the CIS A Sample
Ernst & Young is the CIS leader in providing professional services to foreign automotive
producers and suppliers. We serve all major international companies present in the
market, including: