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Investment Climate in St. Petersburg

attentionattention Vycheslav Vlasov
Natalia Sherbakova
Tax Managers
PriceWaterhouseCoopers

The analysis of provisions and practical application of the St. Petersburg tax legislation allows to highlight its two main features due to which the city managed to stir to activity local investors and raise addi-tional foreign investments. In particular, the advantage of investment climate in our City may be explained by relatively sta-ble tax environment and by a number of tax benefits available to investors.

One of the most progressive features of the St. Petersburg tax policy is that such policy is adopted for some years ahead, whilst in the environment of constant changes in Russian tax legislation. Through adoption of the St. Petersburg laws on taxation in 1997-1999 and 2000-2003 the city, within its competence, provided the predictability of taxation regime for local taxpayers including investors.

Traditionally, the advancement of the City tax legislation is in a gradual decrease of tax burden on businesses through reduction of tax rates. In such a way St. Petersburg was the first region which established the lowest tax rate on purchase of vehicles (2% of the price less VAT and excises, whilst in most other regions this tax amounts to 20%. In accordance with the federal legislation, as or 1 January 2001 no tax on purchase of vehicles will be charged on the territory of Russian Federation). St. Petersburg became the only region which, prior to changes made into federal legislation, abolished living accommodation tax, amounting to 1,5% of sales, as of 1 January 1999 (in other regions this tax will be abolished only as of 1 January 2001). Another illustrative example is introduction of gradual decrease of the rate of profits tax payable to St. Petersburg budget from 19% in year 2000 to 17%, in year 2003.

Finally the most indicative example was the introduction in year 2000 of a two-year tax moratorium against the increase of federal, regional and local taxes payable to the St. Petersburg budget. This provision in the City legislation should have a positive effect on the city taxpayers already by the year 2001. For instance, in accordance with the federal legislation, the local authorities and the Legislative Councils of Moscow and St. Petersburg have the right to introduce an additional profits tax up to 5% as of 1 January 2001. Given the St. Petersburg tax moratorium and the initiative on gradual reduction of profits tax rate, it could be assumed that during the next two years St Petersburg will have the lowest profit tax rate in Russia. St. Petersburg was the only region which made such a step and this should undoubtedly improve its investment attractiveness. Another important step ofthe City legislators was setting up a system of tax incentives for investors. Although regulations on provision of special tax benefits to investors in St. Petersburg were introduced in the City legislation much later than in the legislation of some other Russian regions, the City has managed to absorb all positive experience of other regions on this matter and provided tax bene-fits to investors taking into account its authority and real opportunities. Below we will discuss the most significant tax benefits in detail.In accordance with the federal legislation, as or 1 January 2001 no tax on purchase of vehicles will be charged on the territory of Russian Federation.

The City benefits are available practically to all investors. Thus, regardless of the value of capital investments, an investor is provided with the right to reduce the base for the portion of profits tax payable to the St. Petersburg budget (currently 19%) by the actual amount of capital investments without limitation established by federal legislation to reduce the taxable profits by not more than 50%. It should be noted that this benefit covers not only capital investments of a production nature, but also investments in non-production sector, which has a great social meaning. Moreover, profits tax incentives are provided to companies bearing costs of maintenance of social and culture objects.In accordance with the federal legislation, as or 1 January 2001 no tax on purchase of vehicles will be charged on the territory of Russian Federation.

If investments in fixed assets exceed Rubles 1 min during four quarters, the investor is eligible to exemption from property tax (2% of the average annual value of property) related to such assets for the period from 8 to 28 following quarters, depending on the value of fixed assets put into operation. Additionally, in 2000 there is a property tax incentive available to the companies with capital investments in fixed assets during the period from 1992 to 1999 exceeding the equivalent of USD 25 min.In accordance with the federal legislation, as or 1 January 2001 no tax on purchase of vehicles will be charged on the territory of Russian Federation.In accordance with the federal legislation, as or 1 January 2001 no tax on purchase of vehicles will be charged on the territory of Russian Federation.

Investors carrying out new construction or reconstruction of property are exempted from land tax related to land parcels used for such activities, for the total period of construction plus two years after the construction is completed.In accordance with the federal legislation, as or 1 January 2001 no tax on purchase of vehicles will be charged on the territory of Russian Federation.

the profit tax chapter of the second part of Tax Code of Russia, discussion of which is scheduled in the Russian State Duma for October 2000. The existing draft of this document does not provide for a similar rule, whilst the importance of this incentive to investors is indisputable. Based on this, we believe that the St. Pe-tersburg authorities and investors themselves should be actively involved in further discussion of the opportunity to include such a provision to the profit tax chapter of the second part of Tax Code of Russia with various consulting bodies of the State Duma and the Government of Russia.In accordance with the federal legislation, as or 1 January 2001 no tax on purchase of vehicles will be charged on the territory of Russian Federation.

In conclusion, we would like to note that the present tax legislation of St. Petersburg is undoubtedly attractive for local and foreign investors. The procedures for application of the above tax incentives is simple enough. Unlike the investors carrying out activities in other regions, St. Petersburg investors do not have to agree their invest-ment projects with regional authorities.In accordance with the federal legislation, as or 1 January 2001 no tax on purchase of vehicles will be charged on the territory of Russian Federation.

The work on improvement of investment tax legislation should continue. In the nearest future the review of City investment tax legisla-tion may be required, considering the tax reform proposed by the Russian Government, which is expected to change considerably the system of regional taxation. For example, draft second part of the Russian Tax Code provides regions with the opportunity to intro-duce real estate tax - a regional tax which will substitute the exist-ing property tax. As soon as this document is adopted, we find it rea-sonable to introduce relevant amendments to the investment tax legislation of St. Petersburg. In this regard we believe that investors should already start discussing the expected changes in the area of regional taxation with the City administration. We hope that this dialogue will be constructive and should facilitate further improve-ment of investment environment in St. Petersburg.In accordance with the federal legislation, as or 1 January 2001 no tax on purchase of vehicles will be charged on the territory of Russian Federation.

Saint Petersburg Business Guide. Official Edition.

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