Alexander Titkov and Artem Ardashev participate in IR Global Guide: International Expansion: Building your Business Overseas

Alex StolarskyPartner, Attorney-at-Law, Schneider Group

Foreword by Andrew Chilvers

Despite these uncertain times, expanding overseas can be a key driver for future growth for an ambitious business. International expansion can breathe new life into a company, drive huge value and set it on a path of continued success.

Expanding a business overseas is a strategic opportunity that will help diversify revenue streams, revitalise product development and give high returns on investment. But expanding a business into different jurisdictions takes time – this is a long distance run, not a sudden sprint to the finish line. Furthermore, expanding operations into a new jurisdiction can be fraught with challenges and risks that need to be addressed long before the first boots are on the ground.

For any company turning up in a foreign country, a multitude of tax and legal issues need to be addressed. This can be a labyrinthine experience and not for the faint hearted – but then faint hearted businesspeople seldom set their sights on overseas expansion.

Tax and compliance have to be at the top of any board’s agenda, ensuring the correct steps are taken the moment the company representatives land in-country. It’s pivotal to learn these issues to avoid any costly mistakes from the start.

What are the main government incentives available in your jurisdiction to attract multi- nationals and FDI investment?

Import substitution, SPIC, industrial parks, special economic zones (SEZ) and territories of advanced socio-economic development (TASED).

Import substitution is aimed at reducing imports of certain goods by localizing their production in Russia / Eurasian Economic Union (EAEU). The main import substitution tools, which include prohibition / restriction of admission of foreign goods and services to state and municipal procurement (e.g. certain heavy machinery goods, software, clothing) and prioritizing all Russian goods and services procured by state-owned organizations, encourage the locally-based production.

Under a special investment contract (SPIC) an investor is obliged to create or modernise production in Russia and in return receives state support: this results in stability of the business, obtaining the status of “Made in Russia” and other incentives.

According to the SPIC, the following tax incentives are available:

• Zero profit tax rate, if SPIC products account for at least 90% of the taxable income

• There is a possibility of separate income (expenses) accounting within the SPIC framework

• Increased amortisation is allowed in certain cases, but is limited to two

• In certain regions additional property and land tax incentives may be granted

• Non-application to the investor of the amendments to the Tax Code, which worsen its position.

There are also incentives associated with the placement of production in an industrial park, a SEZ or a TASED. Industrial parks have the necessary infrastructure and legal regime for production. SEZ and TASED are parts of the territory of the Russian Federation (RF) and a region of the RF, respectively, with a special business regime. Depending on the territory, residents can count on ready-to-use infrastructure, tax, financial, customs and / or administrative privileges.

What industries do you feel there are opportunities in for international investors / businesses in your jurisdiction? What factors do you think contribute to inward investment?

To benefit from these incentives a taxpayer must receive special accreditation, revenue from IT activity must be not lower than 90% and number of employees must be at least 7 persons.

Special economic zones (SEZ)

In Russia, there are four types of SEZ: industrial production, technology and development, tourism and recreation, and logistics.

Residents of a SEZ can benefit from tax incentives, free customs zone regime, and also ready-to-use infrastructure. For better understanding the tax rates and timing, regional laws should be considered.

Why is it important to hire a local firm to support international expansion? How can you help smooth the process for your clients and overcome common pitfalls?

1) Local business legislation can be unpredictable. Local advisors have a better understanding of the most frequently used business models. In some cases, research and development of complex legal structures is not required.

2) In certain cases, it will be less expensive to hire local advisors for a project rather than hire outside specialists.

3) From a practical perspective, outsourcing some functions will help you receive high quality services for predictable results – and also meet requirements set for local business arrangements, e.g. incentives for small and medium-sized enterprises, number of employees required in an enterprise.

4) Hiring a well-established local firm with history and reputation will reduce the risks of fraud and/or misconduct compared hiring individuals.