• Legal Regulations
• Guarantees to Foreign Investors
• Allowances for Foreign Investors
• Restrictions Imposed on Foreign Investors
• Special Economic Zones
• Regional Legislation

The principal law in the area of foreign investments is the Federal Law No.160-FZ as of July 09, 1999 "On Foreign Investments in the Russian Federation" (hereinafter referred to as the "Law on Foreign Investments"). The legal regulations for the foreign investments within the territory of the Russian Federation are also carried out as provided for by other federal laws, regulatory acts and international conventions of the Russian Federation. The constituent entities of the Russian Federation may enact laws and adopt other regulatory acts that are regulating the foreign investments to the extent that such laws and regulatory acts are coming within their terms of reference as well as they comply with the joint terms of reference of the Russian Federation and the constituent entities of the latter.

The national legislation of the Russian Federation grants the foreign investors a legal regime that is not less favorable than the regime provided to the Russian investors (national regime). Any forfeitures may only be provided for by the federal laws of the Russian Federation.

The legislation provides for a wide range of guarantees in respect of foreign investors, including the following:

• guarantees of legal protection of foreign investors' activities within the territory of the Russian Federation;

• guarantees that the foreign investments can be made in various forms within the territory of the Russian Federation (i.e. a foreign investor may carry out investment activities within the Russian Federation in any form that is not prohibited by the statutory provisions);

• guarantees that a foreign investor's rights and obligations can be transferred to other persons (i.e. a foreign investor may, by virtue of respective agreement, transfer his rights (assign claims) or obligations (transfer a debt), and, in conformity with respective provision of law or an award made by a court, the said investor shall transfer his rights (assign claims) or obligations (transfer a debt) to other person);

• guarantees of foreign investors' and commercial entities with the foreign investments protection from unfavourable changes in the legislation of the Russian Federation (Stability Provision);

• guarantees that any income, earnings and other funds that have been received by foreign investors in accordance with the laws, may be used within the territory of the Russian Federation or transferred abroad;

• guarantees that a foreign investor has a right to export property and information in a form of documents or electronic records from the Russian Federation, which had initially been imported in the territory of the Russian Federation as items of a foreign investment;

• guarantees that a foreign investor may acquire securities (i.e. a foreign investor may acquire shares or other securities issued by Russian commercial entities or public (government) securities in accordance with the legislation);

• guarantees that a foreign investor will be entitled to ownership relating to the land plots, other natural resources, buildings, facilities and other items of real estate, etc.

It can be further highlighted that, amongst other allowances granted to foreign investors, there are:

• the allowances for customs and tax payments while an equipment is imported in Russia for the purposes of payment of the charter capital, which particularly represent certain reductions in the amount of duties to be paid or, in exceptional circumstances, an exemption may be allowed;

• tax or other benefits may be granted a commercial entity that has been established with the foreign capital by the legislation of constituent entities of the Russian Federation relating, in particular, to tax exemption for the duties that should have been paid to the budget of such constituent entities of the Russian Federation as well as to the provision of investment tax credit, budget loan, subsidies or subventions, monetary guarantees etc.

The restrictions relating to a foreign investor's business within the territory of the Russian Federation can only be imposed by the federal laws of Russia. Amongst such restrictions, the following measures are provided below.

Restrictions Associated with Particular National Importance of Certain Strategic Activities

The Law on Foreign Investments imposes restrictive exemptions for foreign investors and groups of persons, including a foreign investor with the share in the charter capital of business entities of strategic importance to national defense and national security, and (or) the transactions that lead to control over the strategic companies.

The companies are deemed to be strategic in case they carry out business in one or more areas specified in Article 6 of the Law on Restrictions of Foreign Investments. For example, the following types of activities (42) are included into the list:

• activities related to nuclear materials and radioactive technology;

• activities associated with the manufacture, distribution and maintenance of encryption (cryptographic) facilities, as well as the provision of services for data encryption;

• activities associated with weapons, military equipment and ammunition;

• space activities;

• radio or television broadcasting in the territory, inhabited by half or more residents of the Russian Federation or the publication of the printed edition, one issue at least 1 million copies;

• communication services (in some cases);

• geological survey and (or) exploration and mining in subsurface areas of federal significance;

• production of aquatic biological resources.

The total number of specific activities is 43.

Transactions, resulting in the establishment of control over strategic companies by the foreign investors are allowed only upon resolution on preliminary approval of such transactions by the Government Commission for Control of Foreign Investment in the Russian Federation.

Restrictions on Banking Activity

Russian legislation stipulates the size (quota) of foreign capital investments into the banking system, which is determined by federal law upon the suggestion of the Government of the Russian Federation, in consultation with the Bank of Russia (see Article 18 of the Federal Law "On Banks and banking Activity" as of December 02, 1990 No.395-1, hereinafter – "Law on Banks and Banking Activity"). In addition, the Bank of Russia has the right to impose additional requirements on credit institutions with foreign investment and foreign bank branches with respect to the reporting, adoption of guidelines and a list of banking operations. The special procedure is stipulated for registration of credit companies with foreign investments (see Article 17 of the Law on Banks and Banking Activity).

Alongside with that, the foreign investors in the banking sector are not subject to the guarantees provided for by the Law on Foreign Investments.

Insurance Business Restrictions

The legal guarantees granted to foreign investors in the Law on Foreign Investments do not apply to investments in insurance companies as well. Quotas are stipulated for the participation of foreign investors in the Russian insurance market.

If the size (quota) of foreign capital in the charter capital of insurance companies exceeds 25%, the insurance supervisory authority stops issuing licenses to perform insurance business by the insurance companies that are subsidiaries of foreign investors (the main company) or having a share of foreign investors in its charter capital exceeding 49% (see Article 6 of the Law of the Russian Federation "On the Organization of Insurance" as of November 27, 1992, hereinafter referred to as the "Law on Insurance").

Insurance companies that are subsidiaries to foreign investors (the main company) or having a share of foreign investors in its charter capital exceeding 49%, cannot perform life insurance, mandatory insurance, mandatory state insurance, property insurance related to the implementation of delivery or performance of contract works for state needs, as well as the insurance of property interests of state and municipal enterprises.

Persons exercising functions of a sole executive body and the chief accountant of an insurance company with foreign investments must be Russian residents (see paragraph 7 of Part 3 of Article 6 of the Law on Insurance).

There are also several other additional restrictions.

Restrictions on Land Legislation

According to federal laws, legal entities may not hold titles to land, located on border areas and other specially assigned territories of the Russian Federation (see Part 3 of Article 15 of the Land Code of the Russian Federation).

Foreign citizens, foreign legal entities, stateless persons and legal entities, the share of foreign legal entities and stateless persons in the charter capital of which exceeds 50%, may have plots of land for agricultural purposes and for lease only (see article 3 of the Federal Law "On Turnover of Agricultural Land" as of July 24, 2002 No.101-FZ).

Restrictions on Media

A foreign legal entity and a Russian legal entity with a foreign participatory interest (contribution) in the charter capital in the amount of 50% or more, are not entitled to be a founder of a TV and Video enterprises (see paragraph 1 of Article 19.1 of the Law of the Russian Federation "On Mass Media" as of December 27, 1991 No.2124-1 (hereinafter – "Law on Mass Media").

A foreign legal entity, as well as a Russian legal entity with foreign participatory interest (contribution) in the charter capital is 50% or more, may not establish companies (legal entities), engaged in TV which zone of reliable reception of transmissions covers half and more than a half of the regions of the Russian Federation or the territory inhabited by a half and more than a half of population in Russia (see paragraph 2 of Article 19.1 of the Law on Mass Media).

Restrictions on Air Transport

Establishment in Russia for an aviation company with foreign capital is allowed if the share of foreign capital does not exceed 49% of the charter capital of an aviation company, its director is a Russian citizen and the number of foreign citizens in the management body of an aviation company, does not exceed one third of the management body (see Article 61 of the Air Code of the Russian Federation as of March 19, 1997).

A Special Economic Zone is a limited part of the territory of the Russian Federation, which is respectively determined by the Government of the Russian Federation where business is carried out under a special regime that establishes certain tax, customs and other concessions granted to its residents. The special economic zones are created for the purposes of development of processing industries, hi-tech industries, manufacturing of innovative products, transport infrastructure as well as of touristic, SPA and resorts development.

The establishment and operation of special economic zones in the Russian Federation is regulated by the Federal Law No.116-FZ as of July 22, 2005 "On Special Economic Zones in the Russian Federation". The following special regulatory acts have also been adopted in Russia:

• the Federal Law No.16-FZ as of January 10, 2006 "On the Special Economic Zone in Kaliningrad Region and On the Alterations to Certain Regulatory Acts of the Russian Federation";

• the Federal Law No.104-FZ as of May 31, 1999 "On the Special Economic Zone in Magadan Region";

• the Agreement between the Government of the Russian Federation, the Government of the Republic of Belarus and the Government of the Republic of Kazakhstan as of June 18, 2010 "On the Free (Special, Dedicated) Economic Zones on the Customs Territory of the Customs Union and on the Customs Procedures Relating to the Free Customs Zone".

The following types of special economic zones can be established in the Russian Federation:

1. industrial and production special economic zones;
2. engineering technical-implementation economic zones;
3. touristic and recreational special economic zones;
4. port special economic zones.

A private entrepreneur or a commercial entity registered in accordance with the statutory provisions on a territory of municipal district, within the borders of which a special economic zone is situated, and provided that the said entrepreneur or an entity have entered into agreement with the special economic zone administrative bodies relating to a specified business activity carried on in accordance with special procedures under special conditions, may be deemed to be residents of a special economic zone.

The residents enjoy various tax benefits, particularly their activities may be subject to tax exemption relating to income tax, value-added tax, excise tax etc.

The regime of free customs zone is adopted within the territories of special economic zones meaning that, under these conditions, the goods of foreign origin are placed and used within the territory of a special economic zone without paying tax duties and the value-added tax and no economic restrictions or prohibitions as provided for by the legislation relating to state regulation of foreign trade are applied in respect of such imported goods, and the Russian goods are placed and used in these economic zones under conditions that apply to export operations in accordance with the export customs regime with an excise to be paid but being free from export customs duties.

No legal acts, tax laws of constituent entities of the Russian Federation, regulatory acts adopted by the local (municipal) authorities in relation to taxes and levies that lead to the adverse position of the taxpayers, which are the special economic zones residents do not apply as a general rule in respect of the special economic zones residents within a period of validity of agreements relating to industrial and production, engineering and technical-implementation, touristic and recreational activities nor do they apply to the activities in port special economic zones.

At the present time, all constituent entities of the Russian Federation have their own regional legislation concerning the matters of investment activities that specify and itemize the provisions of the federal legislation. The laws that have been enacted in various regions considerably vary. However, a number of features that are common for the majority of regional investment laws can be provided as follows:

• they determine the principal priority investment activities for the given region;

• a system of government guarantees is established on the account of a constituent entity of the Russian Federation;

• the main directions and particularities of investment activities being carried out for the account of the budget of respective constituent entity of the Russian Federation are set forth;

• the allowances, benefits or other supportive measures at the level of the given region are provided.

Through regional regulations, the majority of constituent entities of the Russian Federation  provide the investors (and, sometimes, other participants of investment activities) with the regional tax allowances (vehicle tax, gambling tax, tax imposed on property being in possession of legal entities) as well as with a number of conditions relating to the state support of investment business. For certain categories of the taxpayers the constituent entities of the Russian Federation may reduce the income tax rate for the taxes which are to be paid to the budget of these constituent entities of the Russian Federation. Also, the tax legislation allows the provision of deferred (extended) tax payments along with the provision of the investment tax credit.

Generally, the tax allowances are being granted the investors, which are carrying out the investment projects being a priority for the given region or in the event of the direct investments to certain specified industries. The tax allowances may also be granted depending on the amount of investments to be made, the type of an investor's business and other factors.