greenfield project
TRANSCRIPT
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Greenfield project in North West of Russia
TDmitri BabinerPartner, Head of Tax & Legal Practice, St. Petersburg officeDmitri BabinerPartner, Head of Tax & Legal Practice, St. Petersburg office
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Greenfield ProjectGreenfield ProjectSTRUCTURING 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 ImplicationsMajor 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 ConcessionsInvestment 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 RegionSt. 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)
NOSubventions
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
EffectiveProfits tax
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Project Financing - OverviewProject 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-flowProject 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-kindProject 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 leasingProject Financing: Cross-border leasingStrengths:• 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 LaborForeign 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 PlotsLand. 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 ImplicationsLand 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:ü Apply to the authorities (in St. Petersburg – Investment
Department)ü Respective approvals (Investment Department – in St. Petersburg,
MVK – in Leningrad oblast)ü Act on site selectionü Decision on location (in St. Petersburg – to be taken by SPb
Government on provision of the land plot, in LO – preliminary approval of location)
ü Site boundaries and cadastre planü Leasehold rights, Investment Agreement
• Auction alternative – not practical
• With prior approval of the production location:ü Apply to the authorities (in St. Petersburg – Investment
Department)ü Respective approvals (Investment Department – in St. Petersburg,
MVK – in Leningrad oblast)ü Act on site selectionü Decision on location (in St. Petersburg – to be taken by SPb
Government on provision of the land plot, in LO – preliminary approval of location)
ü Site boundaries and cadastre planü Leasehold rights, Investment Agreement
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Ownership to LandOwnership to LandPROS
• 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: ContractsUtilities: 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 StagesGas: 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 PropertyIntellectual 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 ServicesErnst & Young Services
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St.Petersburg & Leningrad Region –Our ExperienceSt.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 ExperienceSt.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. PetersburgInternational 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 BabinerPartner, Head of Tax & Legal Practice in St. Petersburg
+ 7 812 703 78 [email protected]
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Ernst & Young Team
Galina Dontsova has approximately 13 years experience in the customs area, including: due diligence of client’s 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 ambiguousand 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 DontsovaSenior Manager,Head of Customs Group, Russia
+ 7 495 938 66 [email protected]
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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 MayorovManager, Customs
+ 7 812 703 78 [email protected]
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Ernst & Young’s CredentialsErnst & Young’s CredentialsThe 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 & Young’s Automotive CredentialsOur Automotive Qualifications in Russia and the CISErnst & Young’s Automotive CredentialsOur Automotive Qualifications in Russia and the CISIn 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 SampleErnst & 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: