Since Russia began to emerge from a socialist system, it has on the whole been perceived to be a less immediately attractive investment option when compared to the other East European economies. Quite apart from the obvious deterrent of political instability, there have been other difficulties to face: an inadequate legal framework, alien business culture and poor communications infrastructure are often quoted.
In recent months, however, there have been some more positive signs that Russia can mature into a full market economy which deserves early attention from foreign investors. The currency has recently been stable and inflation rates are falling, membership of the World Trade Organisation is expected to be approved soon, and the legislature is beginning to address some of the legal inadequacies - anti-monopoly laws have been passed and laws strengthening property and investor protection rights are anticipated.
With regard to tax law, the present regime is complex and contradictory, with a large number of separate laws effecting some forty Federal taxes, as well as a plethora of local taxes and levies. By the end of 1995, a Tax Code should be progressing through the legislature, which seeks to rationalise the tax system at the Federal level. It promises to iron out inconsistencies, reduce the number of taxes by half and limit the amount of penalties and interest which might apply in a given situation.
Tax and Investment
During 1995, little has changed in the fundamental advice appropriate to investing in Russia. Many businesses take an incremental approach by first setting up an office to sell in their goods (sales activity is possible without creating a taxable presence), succeeded by a Russian legal entity and eventually a full production facility (often developed from an existing Russian facility). However, the branch concept is now fully recognised in Russian law and may be preferred in certain situations.
One of the main tax changes during 1995 was the unexpected withdrawal of certain tax concessions for foreign investors. Many companies importing substantial amounts of capital equipment and building materials for a new production facility previously avoided import VAT thereon by effectively contributing these in kind to the charter capital. The withdrawal significantly added to project costs, although a new exemption for VAT on imported production machinery has gone some way to alleviate the position.
The government has indicated that new foreign investor tax concessions are planned, but their introduction are likely to be subject to political and budgetary constraints.
Another important change has been the introduction of a VAT withholding mechanism, which in its original form has created an absolute VAT cost for all businesses purchasing services within Russia from foreign suppliers. This episode serves as a useful reminder that much of the legislation in Russia continues to be ill-conceived and poorly drafted and requires expert professional advice to minimise any adverse impact.
Coopers & Lybrand
Coopers & Lybrand provides accounting, taxation and consultancy advice to Russian companies and governmental bodies as well as to overseas companies investing into Russia. The firm has some 400 staff in Moscow and St Petersberg, with satellite offices in other cities.
This publication is intended for general guidance only and should not form the basis of specific decisions.
For further information contact the firm on +750 2225 8600, or enter text search 'Coopers & Lybrand' and 'Business Monitor'.
