Kaliningrad Special Economic Zones

The Kaliningrad Special economic zone represents one of the best investment opportunities in Russia today with very low labor tax, reduced profit tax and sometimes full exemption and multiple start up opportunities in Russia’s gateway to Europe.

This platform for entrepreneurship appeared in 2018, and it aimed to create a fiscal haven to promote the return of capital to Russia. However, the legislation in Russia is not discriminatory, so the same conditions designed to draw back Russian capital apply to foreign companies wishing to enter the jurisdiction of these special administrative regions.

Some mistakes made during Russia's transition from a communist to a market economy during the last decade of the 20th century led the most significant Russian companies down the path of complex offshore schemes. The jurisdictions of the UK, USA, and the island of Cyprus were the preferred ones for Russian business.

The pressure that emerged in recent years on these jurisdictions began to generate problems in large Russian companies and, as a result, difficulties in the country's economy. Responding to this challenge, Russia has met with the companies and provided opportunities to return to the Russian jurisdiction ensuring the preservation of those benefits and business conditions presented by offshore companies. The first residents of special administrative areas were the companies benefiting from the aluminum giant En+group, whose turnover is USD 15 300 000 000. According to experts, by moving from the Island of Jersey to the jurisdiction of the Kalinigrad Special Administrative Region, En+group improved its profitability by achieving lower tax rates.

According to the legislation in force, two types of structures can operate in the Russian special administrative regions:

Commercial companies previously operating abroad, credit organizations, non-credit financial organizations, payment system operators and payment infrastructure service operators;

Funds created for the ownership and management of assets or social functions of a non-profit nature.

Trading companies obtain the status of international companies and are given preferential tax treatment. These companies are taxed 0 % on income in the form of dividends, provided that on the day the payment is executed, it has held these dividends for one year and has at least 15 % of the deposit in the share capital of the organization that pays the dividends or has deposit receipts that qualify for them. Also, these businesses are taxed 5 % on income received by foreign persons from shares of international holdings, which, on the date of payment of dividends, are public companies. Besides, residents of the Special Administrative Regions are not subject to taxation on profits earned outside Russia or to tax on transactions involving shares or equity interests in Russian or foreign organizations.

Only companies that have been registered before 01/01/2018 in a FATF adherent state or a member of the Council of Europe Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism, and that have began operating by 1 January 2017, may exercise their right to the status of residents of the special administrative regions. Re-domiciliation and then incorporation is obtained when the resident status is given. The additional requirements include the presence of a division in Russia, through which investments of a total of 50 million roubles (approximately USD 800 000) are made in the Russian economy over six months.

At the moment, the conditions for entering the special administrative zones are quite demanding. Still, the Ministry of Economy, in cooperation with foreign and Russian companies, has already prepared three packages of amendments to the legislation to liberalize the requirements and increase the competitiveness of the special administrative areas.

For example, amendments have already been adopted, allowing residents of the special administrative regions not to disclose to third parties data about beneficiaries or persons controlling companies. Only the administration company of the Special Administrative Region, the control bodies of the Russian Federation, and the courts may obtain such information. Resident companies are exempt from exchange control and may maintain the par value of their shares in foreign currency and pay dividends following international financial reporting standards (IFRS). The geography of the jurisdictions from which re-domiciliation can take place through the countries of the Caribbean Anti-Money Laundering Task Force (CFATF) has been expanded. These countries include the British Virgin Islands (BVI), St. Kitts and Nevis, and the Cayman Islands. After their re-domiciliation process, the companies have had the opportunity to return to the protection of corporate law in the Russian jurisdiction, and have gained the possibility to resolve legal and commercial disputes in international arbitration courts.

As for the second form of residence, international funds, unfortunately, little is known yet, since the law on its registration procedure was adopted on 25 November. According to the text of the law, the book value of the assets of the fund's creator, including those abroad, must be at least 500 million rubles (USD 8 000 000). The founders of the fund cannot be members of it or have membership rights. Nonetheless, they can be commercial companies resident in special administrative areas, and existing funds in order of incorporation. The funds will not be obliged to report publicly on their activities. Ownership and management of assets will not be considered a business activity. For the time being, it is known that the Russian giant Yandex, a leader in the development and implementation of artificial intelligence and unscrewed transport, has expressed its desire to take advantage of this opportunity and register in the Special Administrative Region.

We can see that, at the moment, the Russian offshore companies are still forming their base. Still, even at this initial stage they already have certain competitive advantages, the main one being that their aim is not to obtain occasional income, but that they are created to solve problems in the real sector of the Russian economy. This connection is a guarantee of their sustainability against the influence of the international situation.

Special administrative regions are created in Russia in two areas. On the island of Oktyabrsky in the westernmost part of Russia, the Kaliningrad region, and on the eastern outskirts of Russia, the island of Russky in Primorsky territory. It should be noted that Oktyabrsky Island is closer to Warsaw and Berlin than to Moscow, and the distance from Russky Island to Seoul, Tokyo, or Hong Kong is ten times less than to the Russian capital. In both cases, you should not be concerned about the word "island". Both Russky Island and Oktyabrsky Island are located in Russian cities with well-developed transport and urban infrastructure, Vladivostok and Kaliningrad, and are separated from the mainland by very small straits crossed by road traffic bridges. On Russky Island are the campuses and buildings of the Far East University. Oktyabrsky Island is a booming urban area where we can find the football stadium that hosted the FIFA World Cup.

The territories of the special administrative regions coincide with other platforms for entrepreneurship. Russky Island is part of the territory of the Vladivostok free port, and Oktyabrsky Island is part of a special economic zone. Moreover, residents of the special administrative regions can carry out activities on the territory of Russia and take advantage of the benefits provided by the special economic zones to invest in the real sector of the economy. Contact us