Special Investment Contracts – Opportunity in Crisis

The possibility of concluding a special investment contract was created last year by the Federal Law “On Industrial Policy of the Russian Federation”. According thereto, the special investment contract can be the basis for investment incentives to promote Russian industry.

Even western investors may conclude special investment contracts. It stands to reason that the special investment contracts are concluded primarily with such western investors, who will manufacture products still not manufactured in Russia. Whether such products are already being manufactured locally is determined according to the criteria of Resolution No. 719 of the Russian government dated 17 July 2015 “On the Criteria for Classifying Industrial Products as Having No Equivalent Manufactured in the Russian Federation“. The conclusion of special investment contracts with respect to other products is not excluded.

Meanwhile, several western companies and the responsible state authorities, especially the Ministry of Industry and Trade of the Russian Federation, negotiate the conclusion of special investment contracts.
In these negotiations, the authorities have been shown to be competent and flexible interlocutors.

1. Meaning and conclusion of special investment contracts

1.1 Subject matter

In a special investment contract an investor, who is committed to establish, to modernise or operate a production facility in Russia, will be granted certain benefits (e.g. tax and customs benefits, more details below in section 2.2) by the Russian Federation and/or the a federal state of the Russian Federation). The affected municipality may also be included in the special investment contract.

According to Resolution No. 708 of the Russian government dated 16 July 2015 “On Special Investment Contracts for Selected Industries”, the minimum investment for which appropriate documentary evidence (e.g. a loan agreement) must be provided is RUB 750 mln (currently approx. EUR 10 mln).

Special investment contracts can be concluded for almost all production sectors, excluding the production of alcohol-containing foods, alcohol and tobacco products. The term of a special investment contract may not exceed ten years.

1.2 Continuation of the conditions during the term

The following guarantees are given to the investor for the term of a special investment contract:

• If, after conclusion of the special Investment contract, prohibitions or restrictions on its performance are established, or if additional mandatory requirements for the construction or operation of the production facility are introduced, these will not be applied to the investor.
• It must be provided by legislation on tax and other charges that the total of taxes and other charges payable will not increase.

1.3 Contract application

The investor has to apply for the conclusion of a special investment contract to the responsible authority (in case of conclusion with the Russian Federation, the Ministry of Trade and Industry). The application must be accompanied by documents evidencing the planned investment amount, a list of requested support and a list of the liabilities of the investor. In addition it must include detailed information on the planned production activities, in particular the following details: 

• Characteristics of industrial production,
• List of measures in the investment project,
• Amount of investment,
• Results (indicators) to be achieved in the production (including the sales at the end of each calendar year and at the end of the term of the special investment contract),
• If applicable, a list of imported improved technologies for environmental protection,
• The total of taxes accruing upon the expiry of the term of the special investment contract,
• Proportion of non-Russian materials used,
• Number of jobs to be created as part of the special investment contract.

If the investor intends to manufacture products which have no equivalent in the Russian Federation (that will be frequently the case with western investors), the investor must prove that fact by appropriate documentation.

1.4 Conclusion of the contract

The below described procedure applies for the conclusion of special investment contracts with the Russian Federation. The federal states of the Russian Federation issue their own regulations.

The Ministry of Industry and Trade sends the application within 30 business days with a preliminary opinion to an interdepartmental commission for review as to whether the conclusion of a special investment contract is possible. The interdepartmental commission takes a decision within a further 60 business days and informs the responsible authority accordingly. If the decision is positive, a draft of the special investment contract will be attached to the decision. Within ten business days after receipt of the draft, the investor is obliged to sign the contract, refuse to sign or to suggest changes. Any amendments must be discussed within a further ten business days. If the investor does not respond to the decision within 20 business days, refusal to sign will be assumed.

2. Content of a special investment contract

2.1 Sample contract

The content of a special investment contract is determined on the basis of a sample contract being an annex to the aforementioned Resolution. The sample contract contains the basis for the following provisions:

• Obligation of the investor to carry out the planned investment project, 
• Obligation of the public contractor to carry out specific support measures, 
• Control of the fulfilment of the special investment contract by the obligation of the investor to generate reports on the achievement of key performance indicators and by the relevant state authority
  by preparing audit reports,
• Amendment of the special investment contract in case of change of essential conditions for the implementation of the investment project, 
• Termination of the special investment contract by a court decision for breach of duties by the investor or the public contractor,
• Obligations of the investor (especially to pay damages and return the incentives received) in case
  of termination of the special investment contract based on breach of duty of the investor,
• Obligations of the public contractor (especially to pay damages and payment of a contractual penalty) and of the investor to return the incentives received in case of termination of the special investment contract based on breach of duty of the public contractor.

2.2 Negotiability

The sample contract contains essentially a framework that must be filled out and completed with the details of the project planned by the investor. For this reason, there is considerable scope for the design of each special investment contract.

The willingness of the responsible state authorities to grant incentives primarily depends on the extent of their interest in the investment project. If the interest is great, the state authority will be able to grant extensive tax and customs relief including possibly necessary legislative amendments. The following obligations regarding public tendering procedures are also possible:

• Product approvals,
• Equal treatment of the products with Russian products,
• Approval of the investor as sole bidder if there is no equivalent product manufactured in Russia.

Even penalties imposed on the public contracting party may be agreed in the event of breaches of duty. However, the amount of the penalties may not exceed the total amount of expenditure of the investor caused by the loss of public incentives.