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Q&A

Is Russia right for me?

It depends on what your company is looking to gain financially and strategically by having a manufacturing presence in Russia. You also need to think about readiness, willingness and the ability to go through the learning associated with operating in a foreign country.

Foreign companies that establish a manufacturing operation in Russia are typically responding to localization pressures (in case of public buyers) or customer preferences.

Having a manufacturing presence in Russia is no longer strictly for large multinational corporations. There are business models that allow small operations to benefit from operating in Russia without having to build their own economies of scale to be competitive.

To evaluate if a manufacturing presence in Russia is right for you, please join one of our regular webinars!

Are Russian environmental laws strict?

Russia’s environmental and occupational health and safety laws, are comparable to those in the EU / OECD. Enforcement of these laws does take place in Russia with substantial penalties and fines resulting from violations.

Companies that have processes in place to meet regulatory compliance related to the environment from their manufacturing operations in Russia typically don’t encounter problems.

What are the costs of labour in Russia?

Russia’s labour force is about 70 million strong. The nationwide unemployment rate is 5.7 percent.

Russia’s 2015 nominal wages averaged 33,980 rubles (€450 / $508). That’s less than in China, where salaries average $764.3, and below Mexico’s $636.6, according to Bank of America.

The economic situation in Russia has obviously impacted salary growth. Comparing the last years, there is an enormous drop from 64% of respondents receiving a salary increase in 2014 to only 37% in 2015. And even among those who saw a salary increase in 2015, the majority of respondents (60%) received a meager salary rise of less than 10%. 11% of respondents have actually had a salary reduction in 2015, whereas only 2% saw their salary fall in 2014.

Does Russia have adequate logistics infrastructure?

Yes. Ground freight moves through rail cars or highways but maybe not as frictionless one would see in the west. The country also has an adequate infrastructure in place to move goods into and out of the country by air, waterways and rail car.

Companies seeking space for warehousing or distribution will not have a major problem finding options in the major and second-tier cities in Russia. Although class A space may be limited, class B and C space is readily available for use – often operated by international logistics provider.

How does Russian currency affect manufacturing costs?

The latest devaluation in the Russian Ruble with respect to the € / $ effectively lowers costs incurred in Russia. However, currency devaluation is typically followed by an increase in wages.

Historically, foreign companies have benefited financially by having operations in Russia since the currency devaluates.

What are the best locations in which to manufacture goods?

The answer depends on the short- and long-term objectives of the manufacturer.

Geography will have a direct impact on market, logistics and the cost of labour and these must be thoroughly researched before selecting a location. Other elements to consider include: raw material supply wage structure, labour supply and demand, workforce stability, existing skills, skills development and work ethic.

Without any doubt, Moscow and Moscow Region are the most common locations, as one can find here both a lucrative market as well as well qualified workforce.

Industrial Parks - such as the ones provided by Dega - in strategic locations in Russia may also provide benefits beyond those achieved by operating as a standalone entity.

Is it safe to operate in Russia?

Yes. There are thousands of foreign companies with manufacturing operations in Russia. While worker safety is always an element to consider in any country, the level of security required to do business in Russia is no different from that of any other developed nation.

Does Russia assess import duties on raw materials and equipment?

Yes. Russia’s international trade is based on a harmonized tariff system, much like the EU in which a particular good is classified using the harmonized tariff schedule and subsequent import duties based on country of origin and value.

The Russian government has instituted a number of programs that helps manufacturers reduce and in most cases, eliminate, import duties for goods entering Russia.

Russia assesses 18 % VAT on all imports of raw materials and equipment. There are however exemptions as well as different mechanism that can use to request an instant credit to this VAT tax at the time of import.

How do I setup a manufacturing presence in Russia?

  • Standalone,
  • Using a shelter provider that manages the manufacturing,
  • A joint venture.

What is Russia’s tax structure?

Profit Tax

The maximum profit tax rate is 20%, comprising 2%, payable to the Federal budget and 18%, payable to the Regional budget. It is one of the lowest among major economies.

Tax and other incentives are becoming more common. Many incentives are aimed at promoting innovation and the modernisation of industries.

Taxation of dividends

Dividends are taxed as follows:

  • 13% — at source — for dividends paid by one Russian company to another
  • 15% — at source — for dividends paid by Russian companies to foreign companies
  • 13% for dividends paid by foreign companies to Russian companies (unless the 0% rate below applies). Where a double tax treaty applies, a credit for any withholding tax suffered can be claimed against this liability
  • 0% for dividends paid by either a Russian or foreign company to a Russian company, provided that the Russian company has owned no less than 50% of the company for at least 365 consecutive days.

Dividends from foreign companies registered in certain "low tax" jurisdictions are excluded from this rule.

Property tax

Property tax is a regional tax, thus its application is governed by regional regulations, as well as the Tax Code. The maximum tax rate for property on which the tax base is calculated based on its residual value according to the Tax Code, is 2.2%, and this is the rate currently imposed in the majority of Russia's regions, including Moscow and St. Petersburg.

However, a reduction or exemption is offered by some regional authorities, often conditional on investment in the region.

The maximum tax rate for property on which the tax base is calculated based on its cadastral value is set at the following level:

  • For Moscow: in 2016 and subsequent years — 2%
  • For other regions of the Russian Federation: in 2016 and subsequent years — 2%

Property tax is levied on both movable and immovable property. However, movable property brought into service after 1 January 2013 is excluded from the property tax base, except movable property brought into service in the case of reorganization, liquidation of the legal entity or transfer of property, including the purchasing of property by affiliated parties.

Land tax

Land tax is a local tax, thus its application is governed by local regulations, as well as the Tax Code.

Land tax applies to legal entities and individuals who own land or have a permanent right to its use. Legal entities and individuals who use land free of charge or under lease agreements are not subject to land tax.

The tax base is the cadastral value of the land as determined on 1 January of the reporting year. The cadastral value for a specific plot is determined in accordance with the Russian Land Code. In the case of joint ownership, the tax base is determined for each taxpayer's share of the land.

Local authorities set the land tax rate. Under the Tax Code, these rates may not exceed the following limits:

  • 0.3% of the cadastral value of land which is either used for agricultural purposes, occupied by residential properties or utilities, or acquired for private farming
  • 1.5% of the cadastral value of other land

Transport tax

Transport tax is a regional tax, thus its application is governed by regional regulations, as well as the Tax Code. A region may only impose this tax if its legislation contains transport tax provisions in line with the Tax Code.

Taxpayers are entities and individuals who are registered owners of "transport vehicles" are subject to transport tax.

Transport vehicles are not limited to cars, motorcycles, motor scooters or buses, but include other transport vehicles, such as aircraft, helicopters, yachts, snowmobiles, etc. However, aircraft, ships and river vessels owned by companies whose main activity is the transport of passengers or freight are exempt, as are vehicles used in agricultural production.

The tax base for transport vehicles subject to transport tax depends on the type of the vehicle. The tax rates are set out in the Tax Code, with those for motorised transport vehicles ranging from RUB 1 to 50 per unit of horsepower. Regional authorities have the authority to increase or reduce these rates by a multiple of no more than 10 for certain types of motorised transport vehicles. Special tax rates are established for luxury cars.

State duty

The Tax Code provides an exhaustive list of state duties.The main items applicable to legal entities include:

  • Initiation of court action
  • State registration of a legal entity, and the accreditation of branches and representative offices of a foreign legal entity
  • State registration of issues of shares, including certain securities placed through subscription
  • State registration of a mutual investment fund
  • Receipt of a license to conduct certain activities
  • Provision of services by notaries
  • Vehicle registration

Other

A 1% levy applies to computers, mobile phones and other recording equipment, along with recording media. The tax base is broadly equal to the customs value for imported equipment, or the manufacturer’s sale price. Investors should note that additional taxes, levies and fees may exist depending on the region. These include, for example, license fees for the use of sub-soil resources, pollution levies and timber duties.

Personal income tax

Both Russian tax resident and non-resident individuals are subject to Russian income tax.

Neither the individual’s domicile status nor citizenship is relevant. Russian tax residency is established if an individualis physically present in Russia for at least 183 calendardays during a 12-month rolling period. This 12-monthperiod is not interrupted by brief trips outside Russia (i.e. lasting less than six months) for the purposes of medical treatment or study. A final determination of an individual's tax residency status is made based on whether 183 or more days have been spent in Russia in the calendar year.

Individuals are taxed according to their status as follows: tax residents are taxed on their worldwide income, while tax non-residents are taxed only on their Russian sourced income, irrespective of the nature of the income received.

Residents

There are two different personal income tax rates that may apply to income earned by an individual who is a Russian tax resident.

  • A 13% rate applies to most types of income, i.e. other than income subject to an alternative rate
  • A 35% rate applies to certain prizes, interest that exceeds specific limits on bank deposits, and income deemed to be received from low-interest loans (except loans used to acquire real estate)

Non-residents

A 30% rate applies to non-residents on all types of Russian-sourced income. Passive income (e.g. investment income) is Russian-sourced if it is due/ paid from a source located in Russia. Earned income (e.g. from employment) is Russian-sourced if the duties for which it is received are performed in Russia.

Dividends paid by Russian organisations to non-residents are taxed at a 15% rate, which is withheld at the source.

Highly-qualified specialists

As described in the chapter entitled “Employment”, Russian immigration law stipulates a special beneficial regime that applies to “highly-qualified” foreign employees. An employee qualifies as a “Highly-Qualified Specialist” if he or she stays in Russia on the basis of a work visa and work permit, receives a salary/ remuneration that is no less than RUB 2 million per annum or lower in certain cases, is employed under a Russian employment contract and if he or she has particular experience or skills.Highly-qualified specialists are eligible for the standard personal income tax rate of 13% on remuneration from their employment even before they become Russian tax residents. Employers of highly-qualifiedspecialists are obliged to register these individuals with the Russian tax authorities.Different tax rates apply to residents and non-residents.

Social contributions are payable in respect of individuals engaged under employment or civil contracts, to the following three funds:

  • State Pension Fund
  • Social Insurance Fund
  • Federal Obligatory Medical Insurance Fund

The State Pension Fund and Social Insurance Fund are responsible for the administration of contributions. The obligation to pay insurance contributions falls wholly on the employer, irrespective of an individual's tax status. Although this obligation extends beyond

Russian employers to include foreign companies, there is no mechanism for foreign companies to pay insurance contributions in the absence of a Russian representative office or branch. Failure to pay insurance contributions may result in penalties.

Pension contributions are due in respect of most foreign employees, other than those holding a Highly-Qualified Specialist work permit.

The base for calculating insurance contributions is calculated separately for each employee.

From 1 January 2012, earnings above an annually adjusted cap are subject to additional Pension Fund contributions of 10%. Earnings up to this cap are subject to an overall rate of 30%. The rates and caps for each employee are shown in Table 4 below. Decreased contribution rates of 7.6-20% apply to certain limited categories of taxpayer (broadly, in the IT, social and agricultural spheres and companies registered in the Crimea and Sevastopol) with the same cap. The additional pension contribution of 10% does not apply to such categories of taxpayer.

From 1 January 2012, Russian employers (including foreign companies with a registered presence in Russia) are required to pay pension contributions, including the additional 10%, for remuneration paid to foreign employees who are temporarily staying in Russia and working under an employment contracts.

Additionally, starting from 2015, Russian employers are also required to pay contributions to the Social Fund on top of the remuneration paid to foreign employees. Nevertheless, foreign employees are not eligible to claim any pension or other payment (for example, on leaving Russia) relating to contributions paid, except for residence permit holders. Foreign employees working in Russia on the basis of a Highly-Qualified Specialist work permit are excluded from the requirement to make pension and social insurance contributions. The exception is foreign nationals holding a residence permit who are required to make employer’s pension and social security contributions. From 1 January 2013, the earnings of separate categories of individuals, depending on the activities performed during their work (for instance, underground work, exploration activities, etc.), are subject to additional payments to the Pension Fund at special rates (up to 8% for 2015) without any cap.

Obligatory Accident Insurance contributions are calculated and payable separately from the above insurance contributions. The rates vary from 0.2% to 8.5% of an individual's gross income, depending on the degree of inherent risk in their occupation.

What are the fastest growing industrial sectors in Russia, and where?

Despite a contemporary slump, the automotive and aerospacesector are growing rapidly in the Volga region, St. Petersburg Region, Nizhni Novgorod and Kaluga. Small and midsize supplier are welcomed.

Machine building and supply for the booming agriculture as well as for mining, is becoming another growth sector in Russia.

Due to the availability and low cost of raw materials & semis food processing, woodworking industry, chemicals industryaresteadily growing across the country.

How much does electrical power, heat and gas in Russia cost?

Power:

Average 2,2 Rub./kwh (aprox. 0,03 €/kwh) for 110 kV big-size consumer

Average 4,2 Rub./kwh (aprox. 0,056 €/kwh) 380 V small-size consumer

Heat:

From 1.500 Rub.to 2.200 Rub. / Gcal. (aprox. 20-30 €/ Gcal.)

Gas:

From 4.500 to 5.500 Rub. / 1000 cbm (aprox. 60 – 73 €/ 1000 cbm)

 

Which raw materials & semis are available and inexpensive in Russia?

Timber, wood products

Oil & Gas-based raw materials / pre-products

Steel / Steel products

Non-ferrous metals / rare metals

Agricultural raw materials like wheat, potatos, fruits, pork meat, poultry, a.o