October 1998

by James Hitch and Irina Davydenkova

On July 30, 1998, the Vice-Governor of the City of St. Petersburg signed a new law "On State Support of Investment Activity on the Territory of St. Petersburg" (the "City Law"). The law aims to improve the investment climate in the City of St. Petersburg. However, there are concerns as to whether the adjacent Leningrad Oblast offers similar or better incentives following the enactment last year of an investor- friendly law "On Investment Activities in the Leningrad Oblast," dated July 22, 1997 (the "Oblast Law").

Favorable Investment Environment
The City Law is designed to increase investors' interest in St. Petersburg by creating a favorable investment environment. The city's administration offers the following support to those who want to invest in the city's economy:
- guarantees in the form of security for loans from banks and credit institutions to perform investment activities, subject to the annual limits in the St. Petersburg budget for such purposes (not available in the Leningrad Oblast Law);
- exemptions from certain portions of taxes payable to the St. Petersburg budget;
- granting reductions on the portion of profits taxes payable to the St. Petersburg budget to banks and credit institutions that provide loans to investors;
- favorable terms for real estate leasing intended for the purpose of performing investment activities;
- the option to defer payments or to pay rent in installments, for a period not exceeding five years, in connection with the leasing of real estate owned by city; and
- financial support using funds from the St. Petersburg budget.

Tax Reductions and Exemptions
According to "On Amendments to the Law of St. Petersburg on Tax Privileges" (the "Tax Amendments Law"), enacted on the same day as the City Law, the following measures apply to companies that carry out their business activities in the city of St. Petersburg:

Profits Tax Reduction - In calculating the relevant portion of the profits tax payable to the St. Petersburg budget, the taxable profits of companies shall be decreased by:

- the amounts designated for the financing of capital investments of a production or nonproduction nature, including charter capital contributions; and

- the amounts designated for the repayment of loans taken for investment purposes, including all interest on such loans (provided that the rate of interest will not exceed the rate of refinancing established by the Central Bank of Russia by more than 3 percent).

Unfortunately, these provisions do not compare favorably with the Leningrad Oblast Law, under which investors in manufacturing, construction, agriculture, transport, and communications are granted a 100 percent tax reduction on the relevant portion of the profits tax, as well as the road users tax, payable to the Oblast budget. These reductions are granted during the period of the actual recoupment of
the investment, and thereafter for two years such reductions of 30, 50, or 100 percent are granted, depending on the amount of the investment.

Property Tax Exemption - The Tax Amendments Law provides for:

(a) a 100 percent exemption from the relevant portion of the property tax payable to the St. Petersburg budget in the year 2000 for those companies that have invested more than US$50 million in fixed production assets from January 1, 1992 through December 31, 1999; and

(b) a comparable 50 percent exemption for companies investing at least US$25 million in fixed production assets during the same period.

Considering that the property tax payable to the St. Petersburg budget is currently only 2 percent of property depreciation, and that the tax reduction is available only for the year 2000, it appears that the city property tax reduction is somewhat insignificant, especially in comparison with the amount of investment which is required in order to obtain the reduction. By comparison, the Oblast Law provides a more generous property tax incentive: a 100 percent exemption from the relevant portion of the property tax payable to the Oblast budget during the entire period of the actual recoupment of the investment (rather than only for one year, and regardless of the amount of the investment).

Land Tax Reduction - The relevant portion of the land tax payable to the city of St. Petersburg will not be levied on land plots to be used for the construction and/or reconstruction of buildings and similar structures during and for two years following the end of construction or reconstruction. In contrast, the Leningrad Oblast Law does not provide for a similar land tax reduction.

Tax Reductions for Goods Subject to Excise Tax - A special tax regime with significant tax reductions exists for companies that produce goods subject to the excise tax.

Restrictions
To discourage investors from withdrawing funds from St. Petersburg, particularly after they have already received tax reductions and exemptions, the Tax Amendments Law and the Oblast Law require that, in the event of liquidation or termination of an investment within five years following the end of the application of the tax reductions, all taxes subject to such reductions will be recalculated at the regular rate and must be paid within three months following such liquidation or termination.

Conclusion
Although improvements are needed, the enactment of the City Law and the Tax Amendments Law can be considered a major step in the right direction toward creating an attractive environment for investment in the City of St. Petersburg.

For a more detailed analysis of the St. Petersburg Foreign Investment Laws, see BISNIS OnLine, at www.mac.doc.gov/bisnis/country/regions.html#Northern.

James Hitch is the Managing Partner and Irina Davydenkova an Associate of Baker & McKenzie St. Petersburg.

This report is provided courtesy of the Business Information Service for the Newly Independent States (BISNIS)