2016 china – russia business seminar. new opportunities & new challenges
TRANSCRIPT
2016 China – Russia Business Seminar
New Opportunities & New Challenges
www.pwc.com
PwC Russia
Agenda
1. Investing into Russia - Opportunities for Chinese investors
2. China Tax Reform Blueprint and development & outbound investment crisis management (only Chinese version available)
3. Doing business in Russia - corporate, antimonopoly, employment and migration aspects
4. Tax and non-tax incentives available in Russia
5. Changing customs environment and modern instruments for supporting importers in Russia
6. Forensic review of the proper use of funds & due diligence of third parties
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Investing into Russia − Opportunities for Chinese investors
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1. Russian economy at a glance
2. Russia-China economic relations
3. Key industry segments and opportunities for Chinese companies
4. PwC in Russia
Agenda
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1. Russian economy at a glance
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Relative growth of BRICS countries GDP in 2000-2014 (against 2000)
Russia has historically been growing faster than the world’s average and in line with the peers form BRICS
9.8%
4.1%
3.2%
CAGR 2000-2014 Historical growth drivers
Upward trend in a global commodities cycle
Growth in consumption and development of consumer markets
Improvement of institutional environment (incl. WTO accession in 2012)
Development of financial markets
Vulnerable to changes in commodity prices in short-run, but outperformed world-average in 2000-2014 (4.1% vs 3.7%)
7.1%
3.1%
Source: EIU, PwC analysis
Growth pattern
Brazil
China
India
Russia
SouthAfrica
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
2000 2002 2004 2006 2008 2010 2012 2014
USD
t
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PwC Russia
Certain megatrends will likely drive transformation of the Russian economy in the future
Source: Gazprombank, Census, CBR, Lukoil, HelgiLibrary, PwC analysis
Mining and O&G are shifting eastward Infrastructure challenge
Aging population Financial deepening
By 2025 25% of oil and 50% of natural gas extraction will come from new fields (Yamal, Arctic shelf, East Siberia)
1
Development of new world-class coal, copper and gold projects in underway in the Russian Far East and Eastern Siberia
2
More projects are targeting Asian markets. There is a demand for equity and debt investments to finance development
Russia shall invest USD 100b pa (4% GDP) in infrastructure to secure economic growth
1
Only 2% of total infrastructure investments were private in 2014
3
Due to the budget deficit (2,8% in 2015), the government will foster private investments in infrastructure
Large projects include high speed railways, FIFA 2018, new pipelines and ports
2
By 2030 over 20% of population will be senior (vs 13% today) – 28 mln people
1
Consumer power of new senior generation will be significantly higher
2
Pharma, senior hospitality and healthcare markets will grow faster than GDP. Profile of an average consumer will change
Bank assets to GDP ratio in Russia (84% in 2013) is significantly below the peers (250-300%) in the EU and China
1
Bank assets to GDP shall exceed 130% by 2020 -potential for double-digit growth rates and returns in selected segments of financial market
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Sanctions imposed by the US, the EU and Japan in 2014 have an impact on trade, financial markets and production
Ban on exports of certain products (including equipment for offshore O&G,
high-tech, defence) to Russia
Sanctions imposed by the US, the EU and Japan
Restricted access to financial markets to key Russian banks and companies (ban on
new stock issues and debt financing)
Implications
Russian banks have to replace foreign funding, which made up ca 13% of bank liabilities before the sanctions
Russian O&G companies are looking for new suppliers of off shore technologies and equipment
Valuations of Russian companies have decreased (EV/EBITDA of 3.9* vs 8-18 in BRICS), additional impact comes from RUB depreciation (>50% vs USD and CNY since early 2014)
4Sanctions imposed by Russia
Ban on imports of agricultural products and food from the EU, the US,
Ukraine and Turkey
1
Russian O&G and government majors are looking for new sources of funding for their CAPEX projects
3
2
Trade
Financial markets
Source: Bloomberg, CBR, PwC analysis * - Note: MOEX index (top-50 liquid stocks)
Production
Trade barriers foster development of selected agricultural and manufacturing segments in Russia
5
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Sanctions and oil slump will make 2015 a tough year for the Russian economy, recovery is expected starting from 2017
Key factors driving the forecast
2015 is a tough year for the economy due to continuing sanctions, oil slump, weak RUB and sovereign ratings downgrade
Nominal GDP will decrease greater than real GDP due to RUB depreciation (>50% vs USD/CNY)
The economy shall start recovering in 2017
Nominal GDP forecast and real growth rates
Potential opportunities
Strike deals on very favorable conditions as assets can potentially be undervalued
EIU forecast, 2015-2019
Ride the emerging trends (changing consumer behaviors, financial constrains, less competitive imports)
Source: EIU 5-year forecast as of Oct 2015, PwC analysis
4.5% 4.3%
3.4%
1.3%0.6%
(3.6%)
(0.6%)
2.0%1.5% 1.5%
1.5
1.92.0 2.1
1.9
1.3 1.21.4
1.51.7
-4.0%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
5.0%
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
2010 2011 2012 2013 2014 2015F 2016F 2017F 2018F 2019F
Real GDP growth rate,% Nominal GDP (USD trillion)
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Russian economy at a glance
RUB depreciation, sanctions and megatrends reshaping Russian economy (shifting to the east, infrastructure challenge, aging population and financing deepening) bring new investment opportunities.
6th largest
economy (by PPP, 2014), key supplier of natural resources to the global market
Outperformed world’s average in
2000-2013due to upward trend in commodity cycle
2015 is a tough year for the economy due to the sanctions and oil slump. Expected decline in
real GDP – 3.6%, nominal - >30%
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2. Russia – China economic relations
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Russia-China economic relations have been limited due to geography and lack of infrastructure
Source: roebuckclasses., PwC analysis
Economic cooperation has historically been limited by As a result
Russia makes up only 2% of Chinese international trade
There is no substantial export of Russian natural gas to the Chinese market
Trans-border economic cooperation is limited
Geography - 3.5k km of the border is located in a remote sparsely populated area
Lack of infrastructure (different rail gauges, no cross-border bridges over Heilong Jiang or pipelines)
Limited involvement of both countries in international trade before 00-s
1
2
3
Several large infrastructure projects are underway/proposed
Bridge over Heilong Jiang
Natural gas pipeline East Siberia –China
Expansion of ports in the Russian Far East and railroad infrastructure
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In recent years cross-border trade has demonstrated substantial growth…
Russia – China trade
Trade between Russia and China reached 11.8% of Russian turnover in 2014 (still only 2% of Chinese)
In 2014 80% of Russian export to China constituted of mineral resources and products
Import from China was more diversified, with leading categories being machinery & equipment and consumer goods
Source: Federal Customs Service of Russia, PwC analysis
-
20
40
60
80
100
120
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
US
Db
China to Russia
Russia to China
36%
26%
37%
54Equipment
Shoes and apparel
Other
Russian export to China, 2014
Russian import from China, 2014
72%
10%
9%
9%
42
Oil and fuels
Ore, metals andfertilizersLumber and pulp
Other
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…so have Foreign direct investments
Inward FDI from China
Source: China Statistical Yearbooks 2004-2013, PwC Analysis
Chinese financial investors started actively investing (mainly CIC), key markets – natural resources and consumer
Russia is set to increase its share in Chinese outward FDI (target - 7 times by 2020) to foster economic growth and economic development of the Russian Far East
Year Target Acquirer VendorDeal value (USDm)
Stake,%
2015 Sibur Sinopec Shareholders 1,300 10%
2014 Detsky Mir RCIF AFK Sistema n/d n/d
2013 Uralkali CIC Shareholders 2,008 12.5%
2013 Yamal LNG CNPC Novatek 750 20%
2013 VTBCCB and co-investors
Government 2,330 13.8%
2013 MICEX CIC Shareholders n/d 5.30%
2013 RFP Group RCIF Shareholders n/d 42%
2012 Polyus Gold CIC Shareholders 450 5%
The largest M&A transactions
77 203452 478 395 348
568716 785
4080
794
2.7%2.3%
4.2%
3.7%
2.3%
1.7%1.9%
1.8%2.1%
9.7%
1.7%
0%
2%
4%
6%
8%
10%
12%
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
US
Dm
FDI in Russia Russia in total Chinese ODI
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Wide range of institutions to support Chinese business and investors in Russia were established in recent years
Top-level political cooperation lays foundation for partnership in various business areas
Russia-China trade chamber
Russian-Chinese Business Council
Russia China Investment Fund
The Russian-Chinese center of trade and economic cooperation
Intergovernmental Russian–Chinese Investment Cooperation Commission
Major institutions Mission
“Coordinate efforts of all participants of bilateral economic relations”
Facilitate trade in machinery & equipment and innovations
“Promote joint economic projects” and “facilitate cooperation between Russian and Chinese business community”
“… Investing in projects that advance bilateral economic cooperation between Russia and China”
Facilitate investment projects and decrease administrative and trade barriers
Source: PwC analysis
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Russia-China economic relations
Economic cooperation has historically been limited by lack of infrastructure and geography
In recent years bilateral trade and investments have surged (China is the Russia’s largest trade partner, 11.8% of total exports)
Russian government is set to expand cooperation with Chinese companies to foster economic growth and development of the Russian Far East
Several institutions have been set up; co-investment from RDIF/RCIF is available for Chinese companies and banks
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3. Key industry segments and opportunities for Chinese companies
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Russia has a diversified economy driven by export-oriented O&G and mining sectors and developing consumer market
7%
6%
6%
6%
6%
5%
5%
4%
Retail & wholesale
Oil & gas
Processing industries
Transportation
Finance
Healthcare, education
Construction
Real estate
Public services
Metals & Mining
Agriculture
Power & utilities
Telecom
Other
1,801
19%
11%
11%
3%3%
10%
Key observationsStructure of Russian GDP, 2014
Contributing ~76% in total exports, Oil & Gas and Metals & Mining are key export-oriented industries, which are competitive on a global arena
Other industry segments such as retail, agriculture, industrial manufacturing, transportation and construction present significant domestic markets with a variety of opportunities for foreign investors and suppliers
Russian economy is quite diversified with a wide range of sectors contributing to GDP
USD bn
Source: Rosstat (State Statistics Agency of Russia), World Bank, PwC analysis
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Being a Top-3 Oil & Gas producer, Russia has been recently shifting a strategic focus on Asian markets
Russia in the global context, 2014 Industry outlook
Natural gas production% total world production,bn cubic meters
Oil production% total world production,mn barrels daily
Russia is a top-3 global oil & gas producer and exporter
Russia has the largest natural gas reserves and top-8 oil reserves
Oil & Gas industry is highly concentrated with a significant state involvement
• Few major vertically integrated oil players dominated by a state-owned Rosneft
• State-owned Gazprom is a dominant natural gas producer with a monopoly for export sales
• State-owned Transneft is monopoly operator of oil pipelines
Soviet-era fields in Western Siberia are depleting, and O&G sector is moving eastwards and to the Arctic shelf. Target markets also change
Source: BP, PwC analysis
Total: 3,461 Total: 88.7
162
173
177
579
728
Canada
Iran
Qatar
Russia
The US
4.2
4.3
10.8
11.5
11.6
China
Canada
Russia
SaudiArabia
The US
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Prospective O&G regions
Source: Irkutsk oil
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Existing cooperation and potential opportunities for Chinese companies in Oil & Gas
Contractors in infrastructure & pipelines
JV/ investments in upstream
Supply of equipment and technology
• Yamal LNG-CNPC;
• CNPC - Rosneft (Vankor)
• Chinese contractors & suppliers are expected to participate
• Oil & Gas infrastructure development is on top of the agenda, i.e. investment into Russia – China gas pipeline is expected at ~$55 bn
• Russian O&G companies need to make significant investments in new fields (East Siberia, Arctic shelf) to sustain production volumes
• Financing is constrained due to the sanctions
• Potential for Chinese O&G equipment suppliers and service providers to gain market share from Western competitors
• Supplies and equipment spending of only Rosneft reached $6 bn in 2014
• Hilong investment in coating business in Russia
Seg
men
t p
ote
nti
al
Rec
ent
dea
ls
Source: PwC analysis
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Russia is a top global producer across a wide range of minerals with a solid resource base
17%
Nickel 14%
Copper 4%
Gold 7%
Iron ore 6%
Coal 5%
Steel 4%
Potash
4%
35%
8%
10%
15%
18%
n/a
Rank
#2
#3
#3
#6
#4
#2
Mineral and steel production Mineral reserves% in world’s % in world’s
Russia in the global context Industry outlook
• Russia is among global leaders in metals and mining
RUB depreciation improves cash margins and NPV of Russian mining projects
There are over 40 large-scale mining projects in the Russian Far East on exploration and development stages, namely: Udokan (copper), Baimskoe and Natalka (gold), Tuva and Elga coal projects, Timir (iron ore)
• Focus on export, but Russia makes up ca. 2% of Chinese imports of metals
n/a
Rank
#5
#5
#4
#6
#1
#2
#5
Source: PwC analysis
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Source: PwC analysis
1
2
3
45
6
7
89
10
11
12
13
14
15
16
17 18
19
20
21
22
23
24
25
26
272829
30
31
32
33
3435
36 37
38
39
40
41
42
43
44
45
46
47
China
Mongolia
KazakhstanJapan
Republic
of Korea
DPRK
Moscow
Iran
Iraq
Turkey
Ukraine
Large-scale mining projects in Russia on exploration and development stages
Exploration
and designDevelopment Mining
Coal
Cu
Fe
Ni
Au
Mo
Ti
Zn,Pb
Other
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Existing cooperation and potential opportunities for Chinese companies in Metals & Mining
Equity investments in new projects Supply of machinery & equipment
• CIC – Polyus Gold
• China Shenhua – Rostech – JV to develop coal deposits
• Chinese investors expressed interest in Mechel, Norilsk Nickel and Metalloinvest projects in the Russian Far East
• USD 12+ bn Capex on average per year is planned by mining companies till 2020, driving demand for mining equipment and solutions
• Russian companies are seeking equity partners to develop numerous deposits in the Russian Far East
• Lack of infrastructure might be an issue
Seg
men
t p
ote
nti
al
Rec
ent
dea
ls
• Multiple niche Chinese players have increased their presence in Russian market, specifically in price sensitive segments (i.e. coal)
• At the recent Mining World expo in Moscow approximately 20% of suppliers represented China
Source: PwC analysis
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Agricultural might have a good potential, although there are certain restrictions for the foreign investors
Source: FAO trade statistics, PwC analysis
Russia in the global context Industry outlook
Russian agricultural ban fosters development of aquaculture market which barely exists now
There is a number of large (>USD 1b in revenue) agricultural holdings in Russia potentially available for sale
Oil and grains
Fishery
Russia has the 3rd largest arable land area globally, and one of the highest arable area per capita in the world
Russia has become the 3rd largest exporter of wheat (>20 mt pa) and sunflower oil (ca 3.2 m t) since the Soviet era
Key market – Middle East, shipped through grain terminals in Black sea
5th largest catch in the world and abandoned biological resources (Russian Pacific coast)
Russia makes up 30% of total Chinese fishery imports (mostly pollock)
1
2
3
1Constraints for foreign investors
There are restrictions on land ownership for foreign companies/individuals. Grain exports is highly regulated
Russian government is interested in attracting Chinese investors
2
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Russia is perfectly positioned to satisfy growing demand for timber in China
Russia in the global context
Forests
Industry outlook
RUB depreciation improves bottom line of timber companies in Russia and encourages production of sawn wood (less taxable)
Chinese consumption will likely increase, thanks to growing furniture and construction materials industries
Chinese companies started investing abroad to secure supply
Recent deals
Source: Agroatlas, FAO, PwC analysis
Russian forests comprise 20% of global. Most of timber resources are located close to Russia-China border.
Russia makes up only 16% of Chinese import of softwood (surpassed by New Zealand in 2013, due to high export duties on round timber)
1
2
RCIF – RFP Group (40%, 2013)
AVIC Forestry – processing plants in Tomsk region by 2022
1
2
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Development of infrastructure is key to unlock natural resources potential of the Russian Far East
Source: PwC analysis
Projects in the Russian Far East Other infrastructure projects
• RCIF invests in construction of first railway bridge over Amur
• Dongfang Electric plans to invest in energy projects with RAO EES Vostoka
• Existing infrastructure in the Russian Far East (ports, bridges, power) is inadequate to fully exploit resource potential
• Development of the infrastructure in the region is on top of the agenda for the Russian government (separate ministry was established in 2012)
• There is a demand for infrastructure investments in other parts of Russia (high-speed railways, FIFA 2018, Moscow underground)
• Certain projects might be suitable for Chinese financial investors (PPP), Chinese contractors might be highly competitive
Seg
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ote
nti
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Rec
ent
dea
ls
• China Railway Construction considers participating in expansion of Moscow underground
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Great Wall, Lifan and GAC – plants under construction
Dongfeng, Zotye – contracted assembly starting 2015
Fuyao Glass –a plant launched in 2013
Chinese brands had only 3% sales in 2014 (38% in China);
Lifan, Chery, Geely and Great Wall comprise together 93% of Chinese cars sales in 2014;
Chinese manufacturers have a competitive edge in a price-sensitive market
Russian automotive market is one of the largest in the world. Companies with localized production have advantage
Source:AEB, OICA, PwC Analysis
Russia in the global context
8th largest market in the world (2.3m new light vehicles sold in 2014, 4% of global)
The market is dominated by global conglomerates: Renault-Nissan (31%), VW Group (11%), KIA (8%) and GM Group (8%)
Imported vehicles are subject to high customs duties and make up only 25% of the market
2015 was a very tough (-45%) due to RUB depreciation
Localization:
Localisation proved to be a sound strategy for foreign manufacturers
55% of cars sold in 2014 were foreign brands assembled in Russia (up from 44% in 2012)
1
Industry outlook
Recent activities
1
2
2
3
3
2
1
4
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Recession and RUB depreciation will likely lead to changes in consumer behaviour and transformation of retail market
Source: PwC analysis
E-commerce Apparel retail
• Alibaba opened office in Russia and signed a partnership agreement with Qiwi
• VipShop signed a partnership agreement with KupiVip
• Yota Devices purchased by REX Holdings (ca. USD 100m deal, late 2015)
• RCIF acquired stake in Detsky Mir (the largest infant goods retailer) and had negotiations with Gloria Jeans’ shareholders (mass market apparel) in 2014-2015
• Valuations of Russian e-commerce companies are at the bottom
• RUB depreciation impacts customers' behaviour and attracts customers to low-cost e-retailers/coupon services/etc
• Apparel makes up ca.30% of Chinese export to Russia
• The largest apparel retailers (infant goods, shoes, mass market) rely on Chinese manufactures
Seg
men
t p
ote
nti
al
Rec
ent
dea
ls
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Key industry segments and opportunities for Chinese companies
RUB depreciation will drive transformation of Russian e-commerce, automotive and retail markets benefiting cost-efficient market players
Investment opportunities exist in export-oriented
natural resources industries and transforming
consumer markets:
O&G and metals and mining companies are facing financial constraints due to the sanctions and are looking for equity partners for new deposits/fields
Russian forestry and agriculture are well positioned to meet growing demand in China
Infrastructure investments are highly encouraged by the Russian government
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4. PwC in Russia
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PwC posses a wide range of capabilities in Russia to help you investing and creating value
Deal execution
Deal originationRealizing
potential of the investment
Divestiture
• Due diligence: financial, tax, commercial, operational, legal, HR, environmental, IT
• Financial and tax modelling and model review
• Tax and legal structuring
• SPA, shareholder agreement, and other deal documentation
• Negotiation support
• Strategy development
• Operational performance improvement
• Accounting function
• IT systems
• On-going tax and legal consultancy, restructuring
• HR consultancy
• Business restructuring
• Audit and assurance
• Forensic
• Exit support
• Vendor due diligence
• Tax optimisation on exit
• SPA, shareholder agreement and other deal documentation
• Negotiation support
• Market entry strategy
• Target screening
• Feasibility study
• Financing advice
• Bringing co-investors
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We have a proven track record helping Chinese companies to invest in Russia
Indicative value analysis and financial and tax due
diligence of coal mines and a sea coal terminal in Russia
Valuation, financial and tax due diligence
Large Chinese coal company
Large Chinese e-commerce company
Financial and tax due diligence of a potential target
in Russia
Financial and tax due diligence
Large Chinese energy company
Financial and tax due diligence, valuation of
Russian subsidiary of a large European banking group
Financial and tax due diligence, valuation
Russian washing machine market analysis
Sinopec Oil and Gas
Financial advisor on a potential acquisition of a major upstream company
Financial and tax due diligence
Haier
Market analysis
RCIF
Commercial due diligence of a e-commerce company
Commercial due diligence
Hilong
Financial and tax due diligence of a joint venture in
Russia
Financial and tax due diligence
Chinese investment firm
Financial advisor on a potential acquisition of a stake in a mining project
Financial and tax due diligence
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China Tax Reform Blueprint and development & outbound investment crisis management (only Chinese version available)
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Doing business in Russia – corporate, antimonopoly, employment and migration aspects
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Agenda
1. Introduction
2. Russian legal framework
• Corporate aspects• Antimonopoly regulations• Employment law• Migration law
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1. Introduction
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2. Russian legal framework
• Corporate aspects
• Antimonopoly regulations
• Employment law
• Migration law
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2.1. Corporate aspects
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Corporate aspects
A subsidiary, i.e. a Russian Legal Entity (RLE) can be established in the following forms:
− Limited Liability Company – the form which is most commonly used by the investors;
− Joint Stock Company (“JSC”) (either a public JSC or non-public JSC);
− Other forms
A representative office (RepOffice)
Foreign legal entity (FLE) may carry out activity in Russia via:
RepOffice is a FLE subdivision located remotely from the place of FLE official location. RepOffice shall represent and defense FLE’s interests in Russia. RepOffice is not eligible to carry out any commercial activity;
A branch office (Branch)
Branch is a subdivision of FLE located remotely from the place of FLE official location. Branch is eligible to carry out any activity permitted for FLE by its foundation documents including the activities usually performed by a RepOffice;
A subsidiary
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Corporate aspects
Legal forms of
commercial (for profit)companies
Other legal forms of commercial companies (in addition to LLC, Non-public JSC and Public JSC include:
Full Partnership; Trust Partnership; Production Co-operative; Peasant (Farm) Enterprise
Basically, we recommend to set up a limited liability company (“LLC”) if there is a 100% foreign investor.
In cases of a joint venture non-public JSC may be a better option.
If a company plans to go public over time, Non-public JSC is again a better option since (1) conversion into a Public JSC is not deemed reorganization and (2) does not result in acceleration of creditors’ claims and shareholders’ rights revision.
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Preparation of documents for
registration
For the documents issued abroad legalization procedures* must be completed.
Registration with the state authorities
Registration procedure takes 5 working days. Tax authorities, Non-budgetary funds and statistics authorities will provide the company with the registration certificates.
Opening the bank account and payment of the charter capital
Production of corporate seal, open the bank account(s) for operations in Russia, payment ofthe charter capital within 4 months.
Corporate aspects
*Legalisation requirements. Documents originating from the foreign jurisdictions must be properly authenticated in order to berecognised in Russia. The 1961 Hague Convention applies to the Special Administrative Regions of Hong Kong and Macao only, sothe legalization requirements for these regions can be met by affixing an apostille on the relevant “public documents”. There is theAgreement between Russia and China on Legal Assistance in Civil and Criminal Matters (Beijing, June 19, 1992), however it is notwidely used in practice, so legalization requirements generally apply.
Incorporation of an LLC – major steps for registration process
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2.2. Antimonopoly regulations
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Antimonopoly regulations
Antimonopoly Regulations in Russia –Key Requirements to Conducting Business
• Modern Russian anti-trust legislation has only 10-year history. Key Russian anti-trust law is the Federal Law No. 135-FZ “On Protection of Competition” (has been significantly amended several times during its existence and likely to change in the future);
• Russian anti-trust authorities (“FAS”) became one of the leading law enforcement agencies in Russia with significant powers (including dawn raids, cooperation with police and other state bodies). It has offices in most of regions of Russia;
• Unlike traditional anti-trust authorities, FAS deals not only with competition matters, but with tariff regulations, state procurement, investments into strategic sectors, food retail;
• Key industries under control include: oil and oil products, chemicals, food, automotive, pharmaceuticals, state procurement, transportation and logistics
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Antimonopoly regulations
Antimonopoly Regulations in Russia –Key Requirements to Conducting Business
• Similarly to most jurisdictions, key Russian anti-trust concepts include:
− abuse of dominant position (key concerns include refusal to deal, discriminatory practices, effect of foreign anti-bribery rules);
− cartels (including various communications in the business associations);
− vertical agreements (key focus is on distribution agreements and various restrictions and exclusive rights; IP-related defense is not always available);
− other prohibited agreements (list is not exhaustive);
− unfair competition;
− merger control (significant number of transactions, even intra-group, may require antimonopoly clearance)
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Antimonopoly regulations
Antimonopoly Regulations in Russia –Key Requirements to Conducting Business
• Careful consideration of planned practices is recommended since claims from FAS may significantly disrupt the business:
− reputational damage;
− turnover penalties (up to 15%) for companies;
− criminal liability for company officers;
− disqualification from office;
− civil suits from damaged party
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2.3. Employment law
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Employment law
In addition to employment agreements employment relations in Russia are regulated by:
The Russian Employment Codeand other Federal Laws (i.e., the law on minimum monthly salary; the law on trade unions, their rights and guarantees of their activity; the law on occupation in Russia; etc.)
Legislation of the Russian constituent subjects(i.e., Law of Moscow on employment in Moscow; Law of Moscow on social partnership; etc.)
Social agreements(i.e., agreements between several employers and their employees establishing general principals for economic relations related to respective employees and employers)
Collective agreements (i.e., agreements between employers and employees regulating social and employment relations within the companies in more detail)
Local normative regulations(each employer shall adopt at least the following three local normative regulations:
(i) internal labour regulations(i.e., staff handbook),
(ii) the regulation on personal dataand
(iii)the regulation on salary payment (bonus payment)(or the respective provisions of ii and iii above shall be included in internal labour regulations)
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Employment law
• The employment agreement shall include, inter alia, the following terms:
− the place of work;
− job function;
− duration (as a general rule the employment agreement shall be concluded for an indefinite term. If the employment agreement is concluded for a fixed term, the reason for concluding the agreement for the fixed term shall be provided);
− salary payment and compensation terms
• Conclusion of the employment agreement implies:
− familiarization of the employee against the signature with duly local normative regulations (i.e., internal policies);
− actual signature of the agreement by the employer and the employee;
− formalising HR documents (order on employment, labour book, personal card)
• Termination of the employment agreement
− the agreement may be terminated only based on the grounds stipulated in the Russian employment law;
− on the last working day the employer must make all final settlements with the employee and formalize the respective HR documentation
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Employment law
The main guarantees for the employee
• Employer is obliged to pay the salary in RUB not less than every half a month on days established by internal labour regulations, state authorities require to specify and pay salary in RUB;
• Salary and other work related payments (i.e., bonuses) shall be made by the employer, not by a third party (e.g. another company of the employer’s group);
• The employee is entitled to annual paid vacation of duration not less than 28 calendar days, the normal duration of working hours per week shall not exceed 40 hours;
• The employee may be engaged into work on weekends and on public holidays only in accordance with the procedure established by the law (generally employers have to pay twice as much for the employees’ working on weekends and public holidays);
• The employee shall be reimbursed for expenses incurred during a business trip and shall be paid during the period of temporary disability (time of business trips and vacations shall be paid based on average salary)
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Employment law
Administrative liability
For legal entities: administrative fine of up to RUB 50,000, or administrative suspension of the activity for the period up to 90 days
For executives: administrative fine of up to RUB 5,000
Material liability
The employer may be hold materially liable for the violation of the terms for salary payment, payment for vacation, payment due to the termination of the employment agreement and other payments. If this is the case, the employer will be obliged to make respective payments with interest in the amount established by the law for each day of delay starting from the next day after the due payment date.
Compensation of moral damage
The employer shall compensate moral damage caused to the employee by the employer’s unlawful actions or inaction in a monetary form in the amount to be determined upon mutual agreement between parties to the employment agreement.
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2.4. Migration law
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Migration law
Legal status of foreign nationals in the Russian Federation
Foreign nationals in Russia have the same rights and obligations in terms of the employment law as the Russian nationals, except as otherwise provided by law (e.g. it is prohibited for a foreign national to do the military and civil service in Russia).
Most issues regarding the legal status of foreign nationals in Russia are governed by Federal Law "On Legal Status of Foreign Nationals in the Russian Federation" No. 115-FZ of 25 July 2002, other laws and bylaws.
Chinese nationals shall generally obtain visas to entry Russia. The visa, its category, type and the travel purpose should correspond to the real purpose of coming into Russia and the foreigner's activity in Russia.
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Migration law
1. Those belonging to privileged category of highly qualified specialists (the “HQS”) (foreigners belonging to categories 2 and 3 below may be formalized as HQS) work under HQS work permits
2. Citizens of countries which have visa regime with Russia, including People’s Republic of China work under regular work permits
3. Citizens of countries which have non-visa regime with Russia (e.g. most of the countries of Commonwealth of Independent States) work under patents
4. Citizens of the Eurasian Economic Union’s countries, including Belarus, Kazakhstan and Armenia work without work permits/ patents
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Please kindly note that People’s Republic of China is one of the countries, citizens of which may face additional requirements of the migration authorities (for instance, additional confirmation documents/ papers may be requested by the authorities)!
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Migration law
HQS as a privileged category
• Salary level of not less than 167,000 RUB per month payable through a Russian payroll;
• Quarterly reports of salary payments;
• NO quota;
• NO employment permit;
• Generally employer is judging the HQS’ qualification based on its own expectations;
• Multi entry work visa and HQS work permit are issued for up to 3 years;
• Multi entry work visas for accompanying family members are issued for up to 3 years;
• Simplified migration registration requirements;
• The migration authorities formalise HQS work permit within 14 working days
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General procedure for obtaining permissive documents to hire expatriate employees who are HQS
Step 1Work permit request and entry invitation
Step 2Issue of work visa (up to 3 years)
Step 4Notification on employment
Start of employment
Step 5Tax registration
Step 6Quarterly report
Step 3Collection of work permit
HQS personally receives the work permit
Migration law
3 weeks(14 business days)
1 week 1 -2 weeks On a quarterly basis
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Business trips aspects to be considered
Business visa is NOT a permissive document authorizing employment in Russia. Generally a Chinese national may work in Russia only provided that he/ she has both work permit and work visa.
!
With regard to business and other trips to Russia the following treaties may by considered:
• APEC* Business Travel Card Operating Framework joined by People’s Republic of China in February 2002
• The Treaty between the governments of Russia and SAR Hong Kong dated 23 April 2009 On Mutual Cancellation of Visa Requirements for the Citizens of the Russian Federation and the Permanent Residents of SAR Hong Kong
• The Treaty between the governments of Russia and SAR Macao dated 19 June 2012 On Mutual Cancellation of Visa Requirements for the Citizens of the Russian Federation and the Permanent Residents of SAR Macao
*Asia-Pacific Economic Cooperation
Migration law
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Business trips aspects to be considered
• Business Visa is subdivided into different sub-types of purpose of the visit, e.g. Business Visa sub-type Commercial, Business Visa sub-type Technical Maintenance, etc.;
• If a foreign national entered Russia on the basis of Business Visa sub-type Commercial, he/ she may attend business meetings, participate in auctions, negotiate and sign contracts but may not install, service, or repair the equipment (the activities that are allowed under Business Visa sub-type Technical Maintenance);
• The description of the activities permitted under each sub-type of Business Visa may be found in Purposes of the Visit approved by the Order of the Russian Ministry of Foreign Affairs No. 19723A, Order of the Russian Ministry of Internal Affairs No. 1048, Order of the Russian Federal Security Service No. 922 on 27 December 2003
Migration law
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Administrative liability
• Violation by an employer of employment rules (i.е. employment of foreign nationals without permission) – up to RUB 1,000,000 per each foreign employee, depending on the region of Russia. For company’s officers – up to RUB 70,000, depending on the region of Russia;
• Failure to notify the executive authorities on employment of foreign nationals up toRUB 1,000,000 per each foreign employee, depending on the region of Russia;
• A foreign national, who works without a work permit – up to RUB 7,000 with deportation from Russia, depending on the region of Russia;
• Failure to comply with the migration law may lead to the ban on employing HQS for the term of up to two years;
• Some audits and control measures of the Russian migration authorities in Moscow and in St. Petersburg have recently dealt with the projects of Chinese investors and, also, affected Chinese citizens*
* http://www.dp.ru/a/2015/08/11/FMS_i_prokuratura_ne_nashl/ http://www.rg.ru/2015/04/24/migraciya.html
Migration law
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Legal contacts in Russia
Gennady OdarichDirectorLegal practiceBusiness set-up, [email protected]
Dmitry BessolitsynSenior AssociateLegal practiceBusiness set-up, [email protected]
Alexei DinginSenior AssociateLegal practiceEmployment [email protected]
Ekaterina AvilovaAssociateLegal practiceBusiness set-up, [email protected]
Ivan PopovAssociateLegal practiceBusiness set-up, [email protected]
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Tax and non-tax incentives available in Russia
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Types of tax and non-tax incentives available for investors in Russian regions
*All calculations in this presentation made are based on the exchange rate USD 1 = RR 55
Special investment contract
• Special investment contract is established to foster the
development of manufacturing and innovative sectors of the
Russian economy;
• Tax and non-tax incentives (tax and customs incentives, privilege
on rent payment for land plot, grandfather clause etc.);
• Currently is a matter of legislative process.
Some federal non-tax incentives
• Subsidies of part of interests for financing of investment project;
• Free railway transportation to and from Russian Far East.
• Special-purpose loans for investment projects using the
mechanism of project finance.
Free port Vladivostok
• Designed to develop near-bordered Primorsk region;
• Tax incentives (profits tax, social contributions reduced rates);
• Other non-tax incentives (facilitated processes for foreign citizens
etc.);
• Free customs zone.
Advanced development zones
• Designed for investment attraction to Russian Federation and
first implementation planned for Russian Far East and small
towns;
• Tax incentives (profits tax, property tax, social contributions
reduced rates);
• Other non-tax incentives (eg, simplified migration rules for
foreign citizens employment, special land use regime, etc);
• Free customs zone.
Regional investment project
• Established for investment attraction to Russian Far East;
• Tax incentives (profits tax, property tax, land tax).
Industrial special economic zones
• Designed to develop Russian industry;
• Tax incentives (profits tax, property tax, land tax);
• Free customs zone;
• Other non-tax incentives in some regions (eg, simplified
migration rules for foreigners, fixed lease of land payment, etc);
• State and regional guarantees to banks granting loans to
investors.
Regional tax incentives
• Tax incentives (profits tax, property tax, land tax, transport tax);
• Regional monetary subsidies;
• Regional guarantees to banks financing investors;
• Informational support.
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1. Regional tax incentives
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Regional tax incentives and non-tax forms of support for investors: overview
• Russian Tax Law assumes possibility for regions to develop their own systems of tax incentives and non-tax forms of support for investors.
• Such incentives in respect of regional taxes shall be established and abolished by Russian Tax Code and (or) by tax laws of regions of the Russian Federation.
• Under article 56 of Russian Tax Code tax incentives are privileges granted to individual categories of taxpayers and envisaged by the tax legislation as compared with other taxpayers; such privilege includes the possibility not to pay a tax or to pay a smaller amount of tax.
• Non-tax incentives include but are not limited to the following:
− Provision of budget subsidies, investments for the partial compensation of investment expenses;
− Provision of government guarantee to banks granting loans to investors;
− Simplified access to infrastructure facilities;
− Provision of regional property on lease or as concession or as contribution into the charter capital;
− Decrease of rent payments for investors renting land from the regional government;
− Information, administrative and legal support;
− Others.
• As of today many Russian industrial regions have diverse systems of stimulation measures for investors, which generally assume profit, property, transport or land tax exemptions.
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Moscow City (come into force from 1 January 2016)
Value of investment Currently not specified
Tax incentives
Corporate profits tax:rate
15,5%
Property tax:rate
Exemption for immovable property, 50% of tax for immovable property of industrial complex
Comments The incentives (profit tax, property tax, land tax) are applicable for investors during the term of prioritized investment project, technopark, technopolis, industrial park or industrial complex
Land tax Tax determined as 0,7% from calculated amount of land tax (applicable for subjects of prioritised investment projects, technoparks, industrial parks) and 20% from calculated amount of land tax (applicable for industrial complex)
Type of activity
Implementation of the investment project on particular type of business activity. Covered the majority of types of industrial activity (including automotive industry), except production or sale of tobacco, the implementation of investment projects in the sphere of housing construction, construction of hotels, other accommodation facilities, administrative, business and shopping centers and investments in banks and insurance industries
Resident of technopark or industrial park
Resident must not have a separate subdivision outside MoscowResident must provide to the investment authority full information about tax payments
Core resident of technopark or industrial park
Resident is an entity who satisfies the following criteria:• Does not use simplified taxation system;• Located within the territory of technopark or industrial park and does not have a separate subdivision outside
Moscow;• Agreed to provide data on actual tax payments to the investment authority;• During the two years preceding the year of application for assignment of the anchor resident, has at least two
indicators which are above average among the residents of the technopark or industrial park: the number of jobs per square meter; the amount of taxes paid to the budget of Moscow, etc.
Additionalcomments
Currently, the issues of amount of investments, process of obtaining status of prioritized investment project, order of providing non-tax incentives are a matter of legislation process
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2. Special economic zones
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Special economic zones: overview
Russian special economic zones are established to foster the development of manufacturing and innovative sectors of the Russian economy, to develop tourism, health and resort activity, to stimulate the development of new technology and types of products and improve the port and transport infrastructure in Russia
Each type of SEZ provides tax and customs benefits as well as other kinds of economic incentives in order to stimulate economic development of the particular region
• Industrial SEZ (main activity – manufacturing of goods);
• Technological SEZ (main activity – creation of innovative and IT products);
• Tourism SEZ (main activity – construction and development of health and resort facilities);
• Port SEZ (main activity – warehousing, supply services for ships, ships maintenance and service works, wholesale trading, etc.).
The current Russian law on special economic zones (“SEZ”) envisages the following types of SEZ:
1
2
3
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Kaliningrad region
Kaluga region
Samara region
Republic of Tatarstan
Sverdlovsk regionLipetsk region
Pskov region
Moscow
Crimea
Primorsk region
Stupino (Moscow region)
Industrial special economic zones on a map
Astrakhan region
Developing ISEZ
Developed ISEZ
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Industrial special economic zones: overview
• Industrial special economic zones (“ISEZ”) are established by the Government of Russia on the territories of certain regions where (i) a special regime for business activity is applied and (ii) a free customs zone regime is applicable;
• The term of ISEZ is fixed for the period of 49 years and cannot be prolonged though for some regions the period might vary by law;
• Both tax and non-tax incentives are provided to the residents of ISEZ;
• In order to become a resident of ISEZ a candidate company must enter into an agreement with the Russian Ministry of Economic Development on carrying out industrial production and operational activities (“Agreement”);
• The status of the resident of ISEZ may be cancelled only by the court;
• The amount of investment to be eligible for the incentives shall not be less than 40 mln RR (0,73 mln USD) (except for Kaliningrad region where the minimum threshold is set at 150 mln RR (2,7 mln USD));
• Favourable rate of social contribution is established for residents of ISEZ in case of carrying out R&D activity.
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3. Regional investment projects
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Regional investment projects: overview
• Regional investment project is an investment project aimed at production of goods in a number of the East regions of the Russian Federation;
• The amount of investment shall not be less than 50 mln RR (0,91 mln USD) within the first 3 years or 500 mln RR (9.1 mln USD) within the first 5 years of an investment project (thresholds may be increased by regional law);
• Each Regional investment project shall be performed by one company only;
• The participant of a Regional investment project cannot be (i) a resident of SEZ, (ii) a resident of ADZ, (iii) has branches outside the region of Regional investment project, (iv) be in a consolidated group of taxpayers, (v) be non-commercial organisation, bank, insurance company, etc.;
• The federal part of profits tax rate for a participant of a Regional investment project is 0% (standard rate is 2%) during 10 years when the first revenues from sale of goods produced under the Regional investment project were received (these revenues should amount to 90% of all revenues of the participant);
• The regional part of profits tax rate (standard rate is 18%) for a participant of a Regional investment project cannot be more than 10% during first five years of implementation of the Regional investment project and cannot be less than 10% during the following 5 years (specific rates are established by regional law);
• Tax incentives remain in force through 1 Jan 2029 (the period of tax incentives for those investors who invested not less than 50 mln RR (0,91 mln USD) during first three years of implementation of a Regional investment project ends on 1 Jan 2027);
• Regional investment project regime applies to all Russian East Siberia and Far East regions.
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Selected regional investment project on a map
Primorsk region
Moscow
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Regional investment project: Primorsk region
Profits tax incentives
Rate Period Comment
0% 0-5 years
1. If a participant of a Regional investment project having invested 50 mln RR (0,91 mln USD) or more does not receive revenues during the first three years of implementation of the Regional investment project, the profits tax incentives (both in federal and regional parts) will be applicable from the 4th
year from the date of obtaining the Regional investment project participant status.
2. If a participant of a Regional investment project having invested 500 mlnRR (9,1 mln USD) or more does not receive revenues during first five years of implementation of the Regional investment project, the profits tax incentives (both in federal and regional parts) will be applicable from the 6th year from the date of obtaining the Regional investment project participant status.
10% 6-10 years
20%After the 10th year
Property tax incentives 0% (0-5 years) 0,5% (6-10 years)
Land tax incentives in some Primorsk regions (instead of standard 1,5% rate)
Vladivostok Ussuriysk district
500 mln RR (9,1 mln USD) investment within 5 years
0,3% during 5 years
0% during 5 years(tax preference ends 1 Jan 2027)
150 mln RR (2,7 mln USD) investment within 3 years
0,6% during 3 years
Type of activityAny type of activity (except for oil and gas production, transportation of oil and gas, petrol, tobacco and alcohol production)
Investment declaration Required
Investment project Required
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4. Advanced development zones
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Advanced development zones: overview (1/2)
• Advanced development zones (“ADZ”) are established by the Government of Russia in the territories of the Far East regions of the Russian Federation and in specified monotown`s territory during the first three years, after three years –in each Russian regions where a special regime for business activity is applied;
• Now there are nine ADZs in Russia;
• The term of ADZ is fixed for the period of 70 years and can be prolonged in accordance with Governmental Decision;
• In order to become a resident of ADZ a candidate company must enter into an agreement with the special management company;
• Territory of ADZ cannot be the same with the territory of SEZ;
• The resident of an ADZ cannot be (i) a resident of SEZ, (ii) a participant of a Regional investment project, (iii) has branches outside of ADZ, (iv) be in a consolidated group of taxpayers, (v) be non-commercial organisation, bank, insurance company, etc.;
• The federal part of profits tax rate for ADZ resident is 0% (standard rate is 2%) during 5 years when the first profits from sale of goods produced in ADZ were received (the revenues from ADZ should amount not less than 90% of all revenues of the participant);
• The regional part of profits tax rate (standard rate is 18%) for ADZ resident cannot be more than 5% during the first five years when the first profits from sale of goods produced in ADZ were received and cannot be less than 10% during the following 5 years (specific rates are established by regional law);
• The insurance contribution rate for a resident of ADZ is decreased (7,6% instead of maximum standard 30% for 2015-2017 years) during the first 10 years;
• A free customs zone regime may be applicable for a resident of ADZ.
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Advanced development zones: overview (2/2)
Moscow
Mikhailovskiy(Primorsk region)
Beringovskiy(Chukotka Autonomous okrug)
Kamchatka(the Kamchatka region)
Kangalassy(The Republic of Sakha (Yakutia))
Belogorsk(Amur region)
Priamurskaya(Amur Region)
The number of ADZ has rapidly increased within the last couple of months. The following ADZs have been recently established:
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Advanced development zones: Khabarovsk and Primorsk region
Territory “Komsomolsk” “Khabarovsk” “Nadezhdinskaya”
Region Khabarovsk region Primorsk region
Tax incentives
Rate Period Comments Rate Period
Profit tax0% 0-5 years
Applicable from 1 January 2016
0% 0-5 years
12% 6-10 years 12% 6-10 years
Property tax0% 0-5 years 0% 0-5 years
1,1% 6-10 years 0,5% 6-10 years
Social contributions 7,6%
Type of activity
Agriculture; tobacco production; food, beverage, textile, oil products, chemical, pharmaceutical, automotive, furniture, metal manufacture; telecommunication activities; creation and usage databases and informational resources; administrative activities; education; public health services; science and technology; provision of personnel; services; etc.
Investments > 0,5 mln RR (9,1 k USD)
Free customs zoneApplicable. For equipment – no VAT and customs duties applicable. For stock and materials – no VAT andcustoms duties at the moment of import but subsequent payment is obligatory at the moment of transfer of theproducts from the territory of the region. Hence only deferring of payments is possible for stock and materials
Business plan Required
Investment agreement
Required, concluded with special management company
Subsidies Subsidies for payment of interest on investment loans
Non-tax benefits Project financing
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5. Free port Vladivostok
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Free port Vladivostok: overview
• Free port Vladivostok is established by the Government of Russia in the territories of Primorsk region;
• The term of Free port Vladivostok is fixed for the period of 70 years and can be prolonged in accordance with Governmental Decision;
• In order to become a resident of Free port Vladivostok a candidate company must enter into an agreement with the special management company;
• Territory of an Free port Vladivostok cannot be the same with territory of SEZ or ADZ;
• The resident of Free port Vladivostok cannot be (i) a resident of SEZ, (ii) a participant of a Regional investment project, (iii) has branches outside of Free port Vladivostok , (iv) in a consolidated group of taxpayers, (v) non-commercial organisation, bank, insurance company, etc.;
• The federal part of profits tax rate for Free port Vladivostok residents is 0% (standard rate is 2%) during 5 years, social contributions rate for a Free port Vladivostok residents is 7,6% (standard rate is 30 %) during the first 10 years. The regional part of profits tax rate (standard rate is 18%) for Free port Vladivostok residents cannot be more than 5% during the first five years when the first profits from sale of goods produced in Free port Vladivostok were received and cannot be less than 10% during the following 5 years (specific rates are established by regional law);
• A free customs zone regime may be applicable for a resident of Free port Vladivostok;
• The above mentioned provisions will come into force from 1 January 2016.
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Free port Vladivostok
Investments > 5 mln RR (0,9 mln USD)
Property Tax0% 0-5 years
0,5% 6-10 years
Free customs zone (treated as SEZ)
For equipment – no VAT and customs duties applicable. For stock and materials – no VAT and customs duties at the moment of import but subsequent payment is obligatory at the moment of transfer of the products from the territory of the region. Hence only deferring of payments is possible for stock and materials
Business plan Required
Investment agreement
Required, concluded with special management company
Investment projectRequired (or business activity stated by investment agreement should be new for the participant of selection)
Non-tax benefits
Facilitated visa process for foreign citizens (presence within 8 days);Elimination of recruitment permission for foreign citizens;Provision of work permission for foreign citizens without regard to quota;Special management company’s right to protect residents’ legitimate interests.
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6. Special Investment Contracts (SpIC)
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Special Investment Contracts: overview
• Special Investment Contracts are established to foster the development of manufacturing and innovative sectors of the Russian economy;
• The following tax and non-tax incentives will be granted to investors:
− Individual tax benefits valid through the whole period of the special investment contract (but not more than 10 years);
− Beneficial ‘made in Russia’ criteria;
− Non-tax incentives (e. g. access to state tenders);
− Grandfathering tax clause;
− Moratorium on tax audits;
− Other industry stimulation measures.
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7. Main problems facing by investors
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Main problems facing by investors
Therefore detailed analysis of the legislative provisions and the terms of the investment agreement are needed to minimise potential risks.
Investment agreement
The application procedure for conclusion of the investment agreement, the list of documents/ information and criteria are not well elaborated which creates uncertain environment for investors.
Tax audits
Tax authorities may challenge application of tax incentives by investor based on their own interpretation or ambiguity of the regional legislation provisions and terms of the investment agreement..
Grandfathering provisions
Sometimes the changes of "rules of the game" may occur during the lifetime of investment project and the application of grandfathering clauses may not be guaranteed.
Subsidies
Due to budget constraints some of the compensations and subsidies promised by the regional authorities are not received by investor.
Our experience shows that despite all the efforts of Russian Government and regional authorities to create attractive environment for investors, in practice investors can face the following issues:
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Changing customs environment and modern instruments for supporting importers in Russia
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1. Changing customs environment
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Changing customs environment
• Modernized Customs Code is under development;
• Development of unified approach to treatment of license fees from customs perspective.
• Accession of Armenia and Kyrgyzstan to the EAEU expands interconnected market of the EAEU and provides for additional opportunities for business;
• The EAEU Treaty facilitates trade of goods and services within the EAEU by unification of legislative requirements (e.g. regulations related to technical standards and safety requirements, access to the state procurements, etc.).
Expansion and further integration within the Eurasian Economic Union (EAEU)
Further development of common customs legislation
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Changing customs environment
• Some of Kazakhstan’s commitments taken upon accession to WTO differs from the EAEU legislation, which may create additional opportunities or challenges for companies working in Kazakhstan: − Reduction of import customs duties for some goods
imported into Kazakhstan (more than 3,000 customs codes);
− Withdrawal of special incentives programs
• Therefore, influence of Kazakhstani commitments on the current supply chain of companies operating within the EAEU requires further analysis and monitoring.
• Electronic declaration and development of “single window” approach;
• Managing of “low risk” importers;
• Testing of “Green Channel” for goods imported from China.
Approaches of the Russian customs authorities to administration of the customs clearance
Accession of Kazakhstan to the WTO
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Changing customs environmentNew challenges
• New Free Trade Agreement with Vietnam;
• Negotiations with Israel and Egypt regarding Free Trade Agreements;
• Withdrawal from the Free Trade Zone in respect of the Ukrainian goods
Change of the trade regimes
Trade barriers
• Bans on imports into Russia of some goods from a number of countries;
• Introduction of barriers to foreign goods (e.g. for participation in state procurement tenders)
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2. Special Investment Contracts (SpIC) — New instrument to support investors in Russia
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SpIC and spheres of its application
Public Partner (Government)
Encouraging manufacturing activity
Private Investor (Business)Manufacturing of industrial products
Aim
Encouraging investments in manufacturing of industrial products: - ensuring stable business environment;- industry incentives and preferences.
New instrument for realization of the public-private partnership which is used for encouraging industrial-production growth in Russia
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For which industries SpIC is already available?
• machinery manufacturing• automotive,• machine tool, • metallurgical,• chemical,• pharmaceutical,• biotechnological, • medical,• textile, clothing and footwear, • forest, • pulp and paper,• electrical engineering, • aviation, • shipbuilding,• radio-electronic
Rules for contracting and form of SpICare approved for the following industries:
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Mutual guarantees and commitments
Other guarantees Other commitments
To provide priorityto use the stateproperty
To meet the agreed levelof localization
To give various stimulationmeasures
To implement new technology
To provide legalstability
To invest not less than RUB 750 million
Not to increase the overall tax burden
To set up or modernizeproduction facilities
SpIC
InvestorGovernment
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What conditions should be established in a SpIC?
• Validity period (not longer than 10 years)
• Information about the investment project:
− characteristics of the products
− the amount of investments
− share of foreign materials, etc.
• Rights and obligations of the parties
• The control procedure
• The reporting procedure
• The list of incentive measures
• Responsibilities of the parties
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Responsibility for non compliance with SpIC conditions
In case of government’s failure
In case of investor’s failure • Cease of incentive measures and guarantees
• Compensate unpaid taxes and pay late payment interest (if tax incentives were provided)
• Compensation of the damage caused to the state
• Investor may require termination of the SpIC and compensation of losses/damages in court
• Incentive measures are not further applied, but the Governmental guarantees stay valid
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Conclusions
• Dynamic and changing customs environment brings not only challenges but also opportunities for business;
• Business should constantly monitor and analyze changes in order to timely respond the challenges;
• Foreign companies should find out whether it is feasible and realistic to establish productionin Russia in order to enjoy new incentives.
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Forensic review of the proper use of funds & due diligence of third parties
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1. Forensic review of the proper use of funds in joint ventures and joint operations
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Typical schemes for withdrawal of funds
Investment projects
“Black” revenue
Vendors (shell companies)
Loans and borrowings
Intermediaries in offshore
zones and other jurisdictions
Companies, affiliated with management
Salary project and ghost employees
DistributorsAdvance
payments
Withdrawal of funds
from the business
Purchases at artificially high
prices
“Black” revenue
Intermediaries in offshore
zones and other jurisdictions
DistributorsAdvance
payments
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Key fraud risks in joint operations / joint ventures (1/2)
Shareholder 1 Shareholder 2
Local management
Withdrawal of funds
Joint venture / joint operations
Distributors / agents
Suppliers / Sub-contractors
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Key fraud risks in joint operations / joint ventures (2/2)
Ghost employees are on payroll
• Usage of intermediaries affiliated with management
• Lack of economic substance of services purchased or fictitious services (consulting, marketing, legal services)
• Payments for no delivery or poor quality delivery of services by vendors
Procurement
• Sales through agents and intermediaries affiliated with management
• Improper pricing, inadequate usage of discounts / rebates / bonuses leading to the decrease of revenue
Sales of goods
• Overstatement of expenditure scale
• Duplication of construction work
• Fictitious design repair and maintenance works
• Lack of transparency in pricing
• Chain of sub-contractors affiliated with local management
Construction and repair
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Example of a fraud scheme in procurement
Cooperation agreement (marketing) 50%/50%
Producer Local dealer/ Marketing team
Marketing company 1
Marketing company 2
Individual entrepreneur
Potentially connected
• Non-transparent Coop activities cost allocation• Marketing, consulting or legal services provided by low-profile companies, off-shore entities,
individual entrepreneurs• Inflated pricing for marketing services provided• Engaging agents and other third-parties for organising advertising and promotional events
Risk
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Example of a fraud scheme in construction
Construction project
Delivery of works by a sub-contractor
Manager in the procurement team
Sub-contractor
• Purchase of works / services at artificially high prices• Purchase of fictitious or low quality works / services• Corruption risk
Risk
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Successful strategy of Chinese companies operating in the Russian and CIS market
• Know your customer (due diligence of customers, vendors)
• Control over joint venture activities
• Strong Internal Audit function
• Robust system of internal controls over assets and operations including:
− ‘four eyes’ principle
− contract authorization compliance
• Enhancing corporate culture and business ethics
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How PwC Forensic can help
Review of the proper usage of the funds
Procurement review
Integrity due diligence review of subcontractors, distributors, vendors, customers etc.
Financial analysis and construction contracts review
Forensic support of the internal audit function in the investigation of the misconduct
Review of the overseas transactions
Anti-corruption compliance and remediation
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2. Due diligence of third parties
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Key third-party risks facing foreign investors in Russia (1/4)
Wide spread use of shell companies and/or intermediaries for tax and legal purposes
No requirement for companies to have unique names
Use of mass registration addresses
Close ties to politically exposed persons (PEPs) or ownership or management roles held by family members of PEPs
Sophisticated business structure with offshore element
Potential involvement in non-transparent asset acquisitions; instances of regulatory scrutiny; disqualifications; tax discipline
• Regulatory actions
• Financial losses
• Legal liabilities
• Damage to reputation
Non-transparent ownership structures, possible hidden interests involved
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Example 1 – registration address is a demolition site of Hotel Russia (demolition started in 2006)
Address:
Varvarka street 6, Moscow
According to a Russian corporate database, there are
156 legal entities still
registered at the address of former Hotel Russia.
Key third-party risks facing foreign investors in Russia (2/4)
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Example 2 – Mass registration address
Address:
Garibaldi Street 21, Moscow
The Russian Tax Authorities reports this address as being one of mass registration
(with 314 legal
entities registered there).
Key third-party risks facing foreign investors in Russia (3/4)
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Key third-party risks facing foreign investors in Russia (4/4)
Example 3 – This is a visualization of the corporate structure of a Russian business group with noteworthy affiliations
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Thank you for your attention!
This publication has been prepared for general guidance on matters of interest only, and does
not constitute professional advice. You should not act upon the information contained in this
publication without obtaining specific professional advice. No representation or warranty
(express or implied) is given as to the accuracy or completeness of the information contained in
this publication, and, to the extent permitted by law, PwC Russia, its members, employees and
agents do not accept or assume any liability, responsibility or duty of care for any consequences
of you or anyone else acting, or refraining to act, in reliance on the information contained in this
publication or for any decision based on it.
© 2016 PwC Russia. All rights reserved. Not for further distribution without the permission of
PwC Russia. "PwC Russia" refers to PwCIL member-firms operating in Russia.
"PwC" is the brand under which member firms of PricewaterhouseCoopers International Limited
(PwCIL) operate and provide services. Together, these firms form the PwC network. Each firm
in the network is a separate legal entity and does not act as agent of PwCIL or any other
member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable
for the acts or omissions of any of its member firms nor can it control the exercise of their
professional judgment or bind them in any way.