The Ministry of Eastern Development proposes to adjust the preferential regime in the Kuril Islands

The Ministry of Eastern Development has prepared a bill that removes some of the restrictions on the use of tax benefits within the framework of the preferential regime of the Kuril Islands. It is proposed to lift the ban on providing benefits to companies that are interdependent with organizations created in the Kuril Islands until 2022, that is, until preferences are established. This restriction was introduced in order to prevent existing businesses from using the regime for tax optimization purposes. The department believes that lifting the ban will support established local businesses that are interested in the preferential treatment, and will lead to increased investment.

With the prepared amendments to the Tax Code of the Russian Federation (TC), the Ministry of Eastern Development proposes to adjust the preferential regime in the Kuril Islands to expand the number of its users. Since 2022, there has been a set of tax incentives that were introduced to attract investment to these remote islands with poor infrastructure and difficult climatic conditions (see “Kommersant” dated November 27, 2021). Companies registered on the islands after January 1, 2022 can avoid paying income, land, transport and property taxes for 20 years, as well as apply reduced insurance premiums (7.6% instead of 30%). Benefits are provided provided that the company does not have separate divisions outside the Kuril Islands and was not created by reorganizing an enterprise that previously existed on the islands.

There is also a ban on the use of benefits by a company if its share of 50% or more belongs to a person (or his interdependent person, for example a close relative) who owns another organization registered in the Kuril Islands before January 1, 2022. The Ministry of Eastern Development proposes to lift this ban, considering that its effect limits the range of organizations applying tax preferences: in 2022–2023, 23 companies filed notifications about the use of benefits, of which only 12 actually use them.

The Ministry of Finance told Kommersant that the restriction was introduced in order to prevent existing companies from using the regime; the department did not indicate a position regarding the abandonment of this norm. The Ministry of Eastern Development explained to Kommersant that the bill is aimed at removing “unjustified and artificial investment barriers for Kuril residents.” The agency sees growing interest in the regime from local entrepreneurs, “who know the specifics of the region and have already achieved success in key industries for the Kuril Islands.” The department believes that the risks of shortfall in budget revenues, which explained the restrictions, will be covered by additional tax revenues that will be generated by new projects in such promising areas for the Kuril Islands as fishing, processing and tourism.

Partner of the consulting company B1, Alexander Chizhov, notes that the restriction “apparently prevented potential abuses in the form of obtaining the right to a benefit by creating new companies by persons already doing business in the territory, if an existing company either cannot qualify for a benefit at all, or lost the right to it.” According to him, the wording of the ban gave rise to discussions about its fairness, since they limited benefits for persons who are actually already operating in the region and intend, for example, to implement a new investment project: in order to obtain the right to benefits in relation to a new project, they are forced to either close a historical direction, or sell (at least partially) a stake in the previous company. If there are general “anti-evasion” norms in the Tax Code, Alexander Chizhov believes, the restriction can be considered unnecessary. However, the expert warns, tax authorities will likely scrutinize structures that were previously subject to the restriction—taxpayers will need to be prepared to prove the business purpose of the chosen structure.

Evgenia Kryuchkova