Russian Federation: The New "SPIC 2.0" Mechanism Becomes Law

Last Updated: 9 September 2019
Article by Elena Mikhailovskaia, Wilhelmina Shavshina and Ksenia Sizova

On 2 August 2019, new federal laws regulating the use of special investment contracts (SPIC)1 were published.

The legislation that had previously regulated this area has been significantly revamped, and investors planning to conclude a SPIC would do well to keep in mind the following main changes:

  • Technologies. Under a SPIC, the investor must implement a project involving the launch or development of one of the technologies included on the List of Advanced Technologies, whose formulation has been tasked to the Russian Government (List). A draft List is currently in active development, including with the involvement of the business community.
  • Investments. The previous investment threshold of RUB750 million has been repealed, while the new regulation sets no minimum level of investment-project financing. However, the investor must finance the project at the level specified in the relevant SPIC.
  • SPIC Parties. On the one side, the SPIC is concluded by the investor, and on the other – jointly by the Russian Federation (the federal executive body authorised by the Russian Government), the Russian constituent entity and municipality. Within the scope of the SPIC, the investor undertakes to finance the project with its own money and/or borrowed funds. However, no provisions are made for the investor’s lenders to participate as parties to the SPIC.
  • Procedure for the SPIC's Conclusion. The procedure for concluding a SPIC is established by the Russian Government. In general, the SPIC is concluded with the investor(s) on the basis of open or closed competitive bidding for the right to conclude the contract. The conclusion of a SPIC without a tender is possible where so authorised by an executive decision of the Russian President, or if only one bid is submitted during the competitive bidding.
  • SPIC Form. The law establishes certain requirements binding on the SPIC's content, while the form of the contract itself must be approved by the Russian Government. The new legislation also envisages the possible inclusion in the SPIC of individual conditions that the parties define as material.
  • SPIC Term. The deadline for concluding a SPIC has been set at no later than 31 December 2030, while the effective term of a SPIC depends on the level of investments (no more than five years for investments of RUB50 billion or less, and no more than 20 years for investments of over RUB50 billion).
  • Intellectual Property. The new regulation mandates that on the date of concluding a SPIC (or another date specified in the SPIC), the investor must have exclusive rights – or at the very least usage rights – to the IP encompassed by one of the technologies included on the List for the purposes of industrial-scale production.
  • Achievement of Indicators. A SPIC envisages the setting of target indicators (e.g. product production and sales volumes, minimum tax payments, number of jobs, etc.) for which the investor is made accountable.
  • Stimulus Measures. A SPIC must define measures for stimulating the investor’s activities, which remain operative throughout the effective term of the contract. A SPIC will only reflect the stimulus measures that have been established for the investors concluding such contracts. Consequently, publicly-available measures that are applicable irrespective of the SPIC's conclusion will not be mentioned in the SPIC. The stimulus measures contained in the contract will only be granted upon the investor performing its obligations under the contract. Such stimulus measures will be terminated if the total amount of costs and Russian budget revenue shortfalls under the SPIC exceeds 50% of the total volume of capital investments in the project, as specified in the SPIC. However, the conclusion of a SPIC is only possible in cases where the stimulus measures applicable to the investor (including tax concessions) have been determined by a regulatory enactment adopted by the Russian constituent entity where the project is expected to be implemented.
  • Stability for Investors. From the date on which an SPIC is concluded and throughout its effective term, investors will be exempt from legislation entering into effect after the SPIC conclusion date that introduces restrictions or prohibitions on exercising the rights acquired or utilised by the investor for the purposes of the SPIC's performance.
  • Tax Concessions. The profit-tax concession has been left at the previous level, i.e. the rate can be lowered all the way to 0% (rate levels are set by the relevant Russian constituent entity). However, provisions have also been made for the possible application of a preferential rate in those cases where proceeds from the sale of the goods manufactured within the scope of the SPIC account for less than 90% of total revenue thereunder (provided a number of conditions are complied with). At the same time, a number of additional restrictions have been introduced, including: (i) the aforementioned concession cannot be utilised by the SPIC participants that are taking advantage of other preferential treatment (residents of special (free) economic zones and priority social-and-economic development areas, participants in regional investment projects, etc) and/or special tax treatment; (ii) the term for applying the concession is limited by the period during which the total volume of support-measures received exceeds 50% of the total capital investments in the project; (iii) the amount of taxes exempted under the application of the concession must be repaid in the event of the SPIC's termination in connection with the investor’s breach of its contractual obligations.
  • Investor Liability. The parties are liable for the non-performance or improper performance of their respective obligations to meet certain conditions of the SPIC in the form of (i) compensation for actual damages, and (ii) payment of the corresponding fines, while lost profit is not subject to reimbursement by the parties. The investor’s liability is limited to the total value of the stimulus measures that have been granted.
  • Subsidies. Within the scope of a SPIC, the state may assume the obligation to provide investors with subsidies on a long-term basis, i.e. for more than a single budgetary period (requires a decision of the Russian Government).

The law firm DLA Piper is ready to provide comprehensive legal support to companies planning to conclude a SPIC on the new terms.

First and foremost, we are able to assist in ensuring that the List includes the technologies that companies are planning to utilise within the scope of the SPIC. At this stage, the List is actively being developed with the participation of the Russian Ministry of Industry and Trade and members of the business community.

Footnotes

1 (i) Russian Federal Law No. 290-FZ dated 02 August 2019 “On the Amendment of Russian Federal Law ‘On Industrial Policy in the Russian Federation’ in terms of the Regulation of Special Investment Contracts.” (ii) Russian Federal Law No. 269-FZ dated 02 August 2019 “On the Amendment of Parts One and Two of the Tax Code of the Russian Federation.” (iii) Russian Federal Law No. 295-FZ dated 02 August 2019 “On the Amendment of Art. 78 of the Budget Code of the Russian Federation”.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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