Residents of Priority Development Areas Will Be Entitled to Tax Benefits

In his annual Presidential Address to the Federal Assembly, delivered on 4 December 2014, Vladimir Putin asked the deputies 'not to delay their review of the law on priority development areas (PDA)'.

According to the above-mentioned draft law (No 623874-6), an area of priority social and economic development priority should be understood as a part of the territory of a RF subject, which encompasses one or several municipal formations thereof, and whose residents are eligible for a special tax regime, including their exemption from tax on property of organizations and land tax, as established by a relevant decision of the RF Government.

On the eve of his address to the Federal Assembly, President Vladimir Putin signed a draft law designed to introduce some income tax deductions for PDA residents. According to that law, the rate of income tax to be payable to the federal budget is to be established at 0% for the duration of five tax periods (calendar years) starting with the tax period in which the first profit derived from economic activity in the area of priority development was received. The draft law also proposes a reduced rate of income tax payable to the regional budget, which is to be set in accordance with a relevant law of the RF subject. The tax rate should be no higher than 5% over the course of five tax periods starting with the tax period in which the first profit was received. Over the next five tax periods (calendar years), the rate of tax payable to the regional budget, while remaining beneficial to the taxpayer, is to be increased to 10%.
In order to qualify for the reduced income tax rates, an organization - resident of a PDA should meet a number of requirements. Thus, that organization's income generated by its economic activity in the area of priority social and economic development should amount to no less than 90% of its total revenue. Besides, the organization should not have any autonomous subdivisions outside the PDA; should not be applying any special tax regime; and should not be a member of any consolidated group of taxpayers. Moreover, that organization should not participate in regional investment projects, and should not be a resident of any special economic zone. The proposed tax benefits are not to be extended to non-profit organizations, banks, insurance companies, professional participants of the securities market, etc.

According to the law, the residents of PDA may also be able to qualify for mineral extraction tax (MET) benefits. The draft law proposes the introduction of an additional reducing coefficient, to reflect the territory in which a given commercial mineral product is extracted. Initially set at zero, the new coefficient will gradually increase to 1. MET is to be payable to the budget at the full rate only after ten years from the first profitable tax period.

It should also be noted that this law is designed to supplement the basic draft Federal Law 'On the Areas of Advanced Social and Economic Development of the Russian Federation', which has so far passed its first reading in the State Duma.

On the whole, the proposed tax benefits are designed to create a favorable tax regime with the purpose of utilizing in full the economic potential of Russia's regions and to improve their investment climate. The first PDAs will be created in the constituent entities of the Far Eastern Federal District; later on, such areas may also be established in some other subjects of the Russian Federation. It was this delay in PDA creation that was referred to by President Putin in his Address to the Federal Assembly: 'I propose extending PDA regulations to new projects in a number of single-industry towns with the most difficult socioeconomic situations, rather than waiting three years, as provided by the draft law'.

Vladimir Gromov – Candidate of Economic Sciences, Senior Researcher of the Tax Policy Department of the Institute of Applied Economic Research, RANEPA