This content is from: Local Insights

Russia

LeBoeuf, Lamb, Greene & MacRae Moscow

Russia has adopted a new Law On Foreign Investment in the Russian Federation, with the stated aims of guaranteeing investors' rights and attracting new foreign investment. The new Law (No. 160-FZ, which became effective on July 14 1999), supersedes and replaces the prior law on foreign investment, which dated from 1991. Unfortunately, the new Law contains few improvements or advantages over the prior law and in some respects has created new doubts and questions. While paying lip service to the needs and rights of foreign investors the new Law does relatively little to address them in practice.

The main provisions of the new Law preserve basic legal protections for foreign investors, who may be legal entities, individuals, or foreign states. Foreign investors are entitled to rights no less favourable than domestic investors "with exceptions established by federal laws". Restrictions are allowed "only to the extent required" by a broad laundry list of goals, such as protection of "public morals and health . . . [or] . . . the defence and security of the State". Special privileges may also be granted by law to promote Russian social and economic development. Foreign investors are entitled to make investments in any manner not expressly prohibited by law and to reinvest or repatriate profits and other distributions freely, after payment of applicable taxes. Further, foreign investors have the right to compensation for damages inflicted by illegal acts or omissions of Russian authorities; and to protection from seizure or nationalization of their investments, except pursuant to federal law and with payment of compensation and damages. (Interestingly, however, the new Law has dropped the internationally accepted reference to "prompt, adequate and effective compensation" that appeared in Article 7 of the 1991 law.)

Special categories.

The Law establishes certain categories of investment that are entitled to special protection or privileges. Under Article 4.5, a commercial organization in which a foreign investor owns at least 10% of equity is entitled to the same protections under the Law as the foreign investor itself. (However, subsidiaries of such a commercial organization are not.) Under Article 9.1, the Law's much-discussed tax stabilization clause (described below) applies only to Russian companies with more than 25% foreign equity ownership, or that are implementing "priority investment projects." Article 2 defines a priority investment project as a project with foreign investment of at least 1 billion rubles ($40 million), or where a foreign investor has purchased an equity interest of at least 100 million rubles; in either case, the investment must also be included in a list of projects approved by the Russian government.

Tax stabilization clause.

One of the new features of the Law is the tax stabilization clause set forth in Article 9. For qualifying companies and projects, the clause prohibits increases in the rates of certain import duties and federal taxes until initial investments have been recouped (up to a maximum of seven years, unless this period is extended by the Russian government under certain conditions). Key exceptions exist for protective customs tariffs on commodities, excise tax, VAT on domestic goods, and pension fund payments. Article 9.4 provides a further and potentially broad exception for laws protecting certain public or state interests. Article 9.6 contemplates the adoption of regulations to implement these principles. It would also appear that corresponding changes are needed in Russian tax legislation. Given all of these exceptions and qualifications, it remains to be seen whether the tax stabilization clause will turn out to be a real benefit for foreign investors.

By Brian Zimbler and Ksenia Arbatova

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