The company contacted BBNP specialists for advice on taxation issues as part of a regional investment project (hereinafter referred to as RIP). The company was a party to an investment contract concluded with the Kostroma Region Administration on November 27, 2013, almost immediately after the entry into force of the law on the implementation of RIPs in certain Russian regions¹.

Starting from the date of conclusion of the contract, the client was entitled to tax breaks in the form of a reduced income tax rate when selling RIP². However, after the investment project was completed, the organization had difficulties in correctly calculating and paying tax to the regional budget due to the fact that the obligations under the agreement were fulfilled before the end of the income tax period, and the organization's activities continued, as it operates in the production cycle using complex technical processes. As a result, revenues from the sale of RIPs amounted to less than 90% of the organization's total income in the current tax period².

Since the RIP participant did not satisfy the criterion of territorial performance of activity³, the provision on the effect of the tax benefit for 10 tax periods did not apply to him. The application of a preferential rate outside the permitted period entails an unreasonable tax benefit for the taxpayer, which may lead to tax control measures and tax liability measures.

When resolving this issue, BBNP experts explored all the necessary sources: an investment agreement, since it is an initial document establishing the obligations of the parties; the provisions of the Tax Code of the Russian Federation that determine the scope of the special tax regime; regional regulations that determine the powers of regional authorities to conclude such agreements and detail tax benefits and the conditions for their application for organizations participating in projects. After doing this work, as well as analyzing law enforcement practice, BBNP specialists determined the exact date and procedure for calculating the client's income tax, submitted a report on the company's tax regime during the implementation of the RIP and recommended that it not apply tax benefits outside the period established by the agreement, despite the incomplete tax period.
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Following BBNP's recommendations, the client refused to apply tax breaks outside the established period, thereby protecting his business from tax prosecution and related impressive sanctions.

There are regions in our country whose budget revenues are mainly replenished from funds provided as federal financial assistance under budget legislation. Realizing the need to rectify this situation, the state is trying to create a favorable investment climate in these regions in various ways, including using tax breaks and/or special tax regimes.

In order to develop business at the regional level, Federal Law No. 267-FZ of September 30, 2013 “On Amendments to Parts One and Two of the Tax Code of the Russian Federation to stimulate the implementation of regional investment projects in the Far Eastern Federal District and certain constituent entities of the Russian Federation” was adopted. Thanks to this, a new form of investment activity has appeared in the legal system of the Russian Federation — a regional investment project. In addition to introducing the concept of an investment contract, defining the specifics of its conclusion, execution and other relationships between the parties to such an agreement, tax benefits were established for participants in these projects.

However, the use of tax benefits by RIP participants is hampered by the very complicated procedure for their use, the complex accounting mechanism for these purposes, as well as bureaucratic components.

¹ Federal Law No. 267-FZ of September 30, 2013 “On Amendments to Parts One and Two of the Tax Code of the Russian Federation to Promote the Implementation of Regional Investment Projects in the Far Eastern Federal District and Certain Constituent Entities of the Russian Federation”

² A taxpayer participating in an RIP has the right to apply tax rates to the tax base in the amounts and in accordance with Article 284.3 of the Tax Code of the Russian Federation, provided that income from the sale of goods produced as a result of the sale of RIPs accounts for at least 90% of all income taken into account when determining the income tax base in accordance with Chapter 25 of the Tax Code of the Russian Federation, excluding income in the form of positive exchange differences provided for in paragraph 11 of Article 250 of the Tax Code of the Russian Federation.

The tax base — the monetary value of profits received from the implementation of an investment project — is determined on the basis of separate accounting of income (expenses) received (produced) during the implementation of this investment project and income (expenses) received (produced) from other economic activities.

Article 284.3 of the Tax Code of the Russian Federation establishes deadlines for the use of preferential rates by taxpayers participating in the RIP, namely: the preferential rate is applied for ten tax periods starting from the tax period in which, according to tax accounting data, the first proceeds from the sale of goods produced as a result of the implementation of a regional investment project were recognized. The Tax Code of the Russian Federation also establishes other maximum terms for applying the relevant tax benefit. At the same time, both the period of application of the tax benefit and the end of application may be established by regional legislation in the relevant report/tax period. In particular, the exemption may expire in the next reporting period, although the tax period has not been completed.

³ Subparagraph 1, paragraph 1 of Article 25.8 of the Tax Code of the Russian Federation

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