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Germany

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

Germany has an open and welcoming attitude towards FDI.  The 1956 U.S.-Federal Republic of Germany Treaty of Friendship, Commerce and Navigation affords U.S. investors national treatment and provides for the free movement of capital between the United States and Germany. As an OECD member, Germany adheres to the OECD National Treatment Instrument and the OECD Codes of Liberalization of Capital Movements and of Invisible Operations.  The Foreign Trade and Payments Act and the Foreign Trade and Payments Ordinance provide the legal basis for the Federal Ministry for Economic Affairs and Energy to review acquisitions of domestic companies by foreign buyers, to assess whether these transactions pose a risk to the public order or national security (for example, when the investment pertains to critical infrastructure).  For many decades, Germany has experienced significant inbound investment, which is widely recognized as a considerable contributor to Germany’s growth and prosperity. The German government and industry actively encourage foreign investment. U.S. investment continues to account for a significant share of Germany’s FDI. The investment-related challenges foreign companies face are generally the same as for domestic firms, for example, high marginal income tax rates and labor laws that complicate hiring and dismissals.

Limits on Foreign Control and Right to Private Ownership and Establishment

Under German law, a foreign-owned company registered in the Federal Republic of Germany as a GmbH (limited liability company) or an AG (joint stock company) is treated the same as a German-owned company.  There are no special nationality requirements for directors or shareholders.

However, Germany does prohibit the foreign provision of employee placement services, such as providing temporary office support, domestic help, or executive search services.

While Germany’s Foreign Economic Law permits national security screening of inbound direct investment in individual transactions, in practice no investments have been blocked to date.  Growing Chinese investment activities and acquisitions of German businesses in recent years – including of Mittelstand (mid-sized) industrial market leaders – led German authorities to amend domestic investment screening provisions in 2017, clarifying their scope and giving authorities more time to conduct reviews.  The government further lowered the threshold for the screening of acquisitions in critical infrastructure and sensitive sectors in 2018, to 10 percent of voting rights of a German company. The amendment also added media companies to the list of sensitive sectors to which the lower threshold applies, to prevent foreign actors from engaging in disinformation.  In a prominent case in 2016, the German government withdrew its approval and announced a re-examination of the acquisition of German semi-conductor producer Aixtron by China’s Fujian Grand Chip Investment Fund based on national security concerns.

Other Investment Policy Reviews

The World Bank Group’s “Doing Business 2019” and Economist Intelligence Unit both provide additional information on Germany investment climate.  The American Chamber of Commerce in Germany publishes results of an annual survey of U.S. investors in Germany on business and investment sentiment (“AmCham Germany Transatlantic Business Barometer”).

Business Facilitation

Before engaging in commercial activities, companies and business operators must register in public directories, the two most significant of which are the commercial register (Handelsregister) and the trade office register (Gewerberegister).

Applications for registration at the commercial register, which is publically available under www.handelsregister.de  , are electronically filed in publicly certified form through a notary.  The commercial register provides information about all relevant relationships between merchants and commercial companies, including names of partners and managing directors, capital stock, liability limitations, and insolvency proceedings.  Registration costs vary depending on the size of the company.

Germany Trade and Invest (GTAI), the country’s economic development agency, can assist in the registration processes (https://www.gtai.de/GTAI/Navigation/EN/Invest/Investment-guide/Establishing-a-company/business-registration.html  ) and advise investors, including micro-, small-, and medium-sized enterprises (MSMEs), on how to obtain incentives.

In the EU, MSMEs are defined as follows:

  • Micro-enterprises:  less than 10 employees and less than €2 million annual turnover or less than €2 million in balance sheet total.
  • Small-enterprises:  less than 50 employees and less than €10 million annual turnover or less than €10 million in balance sheet total.
  • Medium-sized enterprises:  less than 250 employees and less than €50 million annual turnover or less than €43 million in balance sheet total.

Outward Investment

The Federal Government provides guarantees for investments by German-based companies in developing and emerging economies and countries in transition in order to insure them against political risks.  In order to receive guarantees, the investment must have adequate legal protection in the host country. The Federal Government does not insure against commercial risks.

2. Bilateral Investment Agreements and Taxation Treaties

Germany does not have a bilateral investment treaty (BIT) with the United States. However, a Friendship, Commerce and Navigation (FCN) treaty dating from 1956 contains many BIT-relevant provisions including national treatment, most-favored nation, free capital flows, and full protection and security.

Germany has bilateral investment treaties in force with 126 countries and territories.  Treaties with former sovereign entities (including Czechoslovakia, the Soviet Union, Sudan, and Yugoslavia) continue to apply in an additional seven cases.  These are indicated with an asterisk (*) and have not been taken into account in regard to the total number of treaties. Treaties are in force with the following states, territories, or former sovereign entities.  For a full list of treaties containing investment provisions that are currently in force, see the UNCTAD Navigator at http://investmentpolicyhub.unctad.org/IIA/CountryBits/78#iiaInnerMenu  .

Afghanistan; Albania; Algeria; Angola; Antigua and Barbuda; Argentina; Armenia; Azerbaijan; Bahrain; Bangladesh; Barbados; Belarus; Benin; Bosnia and Herzegovina; Botswana; Brunei; Bulgaria; Burkina Faso; Burundi; Cambodia; Cameroon; Cape Verde; Central African Republic; Chad; Chile; China (People’s Republic); Congo (Republic); Congo (Democratic Republic); Costa Rica; Croatia; Cuba; Czechoslovakia; Czech Republic*; Dominica; Egypt; El Salvador; Estonia; Eswatini; Ethiopia; Gabon; Georgia; Ghana; Greece; Guatemala; Guinea; Guyana; Haiti; Honduras; Hong Kong; Hungary; Iran; Ivory Coast; Jamaica; Jordan; Kazakhstan; Kenya; Republic of Korea; Kosovo*; Kuwait; Kyrgyzstan; Laos; Latvia; Lebanon; Lesotho; Liberia; Libya; Lithuania; Madagascar; Malaysia; Mali; Malta; Mauritania; Mauritius; Mexico; Moldova; Mongolia; Montenegro*; Morocco; Mozambique; Namibia; Nepal; Nicaragua; Niger; Nigeria; North Macedonia; Oman; Pakistan; Palestinian Territories; Panama; Papua New Guinea; Paraguay; Peru; Philippines; Poland; Portugal; Qatar; Romania; Russia*; Rwanda; Saudi Arabia; Senegal; Serbia*; Sierra Leone; Singapore; Slovak Republic*; Slovenia; Somalia; South Sudan*; Soviet Union; Sri Lanka; St. Lucia; St. Vincent and the Grenadines; Sudan; Syria; Tajikistan; Tanzania; Thailand; Togo; Trinidad & Tobago; Tunisia; Turkey; Turkmenistan; Uganda; Ukraine; United Arab Emirates; Uruguay; Uzbekistan; Venezuela; Vietnam; Yemen; Yugoslavia; Zambia; and Zimbabwe.

A BIT with Bolivia was terminated in May 2014, a BIT with South Africa was terminated in October 2014, BITs with India and Indonesia were terminated in June 2017, and a BIT with Ecuador was terminated in May 2018.  The current BIT with Poland will be terminated in October 2019.

Germany has ratified treaties with the following countries and territories that have not yet entered into force:

Country Signed Temporarily Applicable
Brazil 09/21/1995 No
Congo (Republic) 11/22/2010 *
Iraq 12/04/2010 No
Israel 06/24/1976 Yes
Pakistan 12/01/2009 *
Timor-Leste 08/10/2005 No
Panama* 01/25/2011 *
(*) Previous treaties apply

Bilateral Taxation Treaties:

Taxation of U.S. firms within Germany is governed by the “Convention for the Avoidance of Double Taxation with Respect to Taxes on Income.” This treaty has been in effect since 1989 and was extended in 1991 to the territory of the former German Democratic Republic. With respect to income taxes, both countries agreed to grant credit for their respective federal income taxes on taxes paid on profits by enterprises located in each other’s territory.  A Protocol of 2006 updates the existing tax treaty and includes several changes, including a zero-rate provision for subsidiary-parent dividends, a more restrictive limitation on benefits provision, and a mandatory binding arbitration provision. In 2013, Germany and the United States signed an agreement on legal and administrative cooperation and information exchange with regard to the U.S. Foreign Account Tax Compliance Act. (Full document at https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Steuern/Internationales_
Steuerrecht/Staatenbezogene_Informationen/Laender_A_Z/Verein_Staaten/2013-10-15-USA-Abkommen-FATCA.html
 
).

As of January 2019, Germany had bilateral tax treaties with a total of 96 countries, including with the United States, and, regarding inheritance taxes, with 6 countries.  It has special bilateral treaties with respect to income and assets by shipping and aerospace companies with 10 countries and has treaties relating to the exchange of information and administrative assistance with 27 countries.  Germany has initiated and/or is renegotiating new income and wealth tax treaties with 64 countries, special bilateral treaties with respect to income and assets by shipping and aerospace companies with 2 countries, and information exchange and administrative assistance treaties with 7 countries.

4. Industrial Policies

Investment Incentives

Federal and state investment incentives – including investment grants, labor-related and R&D incentives, public loans, and public guarantees – are available to domestic and foreign investors alike.  Different incentives can be combined. In general, foreign and German investors have to meet the same criteria for eligibility.

Germany Trade & Invest, Germany’s federal economic development agency, provides comprehensive information on incentives in English at:  www.gtai.com/incentives-programs  .

Foreign Trade Zones/Free Ports/Trade Facilitation

There are currently two free ports in Germany operating under EU law:  Bremerhaven and Cuxhaven. The duty-free zones within the ports also permit value-added processing and manufacturing for EU-external markets, albeit with certain requirements.  All are open to both domestic and foreign entities. In recent years, falling tariffs and the progressive enlargement of the EU have eroded much of the utility and attractiveness of duty-free zones.

Performance and Data Localization Requirements

In general, there are no requirements for local sourcing, export percentage, or local or national ownership.  In some cases, however, there may be performance requirements tied to the incentive, such as creation of jobs or maintaining a certain level of employment for a prescribed length of time.

U.S. companies can generally obtain the visas and work permits required to do business in Germany.  U.S. Citizens may apply for work and residential permits from within Germany. Germany Trade & Invest offers detailed information online at www.gtai.com/coming-to-germany  .

There are no localization requirements for data storage in Germany.  However, in recent years German and European cloud providers have sought to market the domestic location of their servers as a competitive advantage.

7. State-Owned Enterprises

The formal term for state-owned enterprises (SOEs) in Germany translates as “public funds, institutions, or companies,” and refers to entities whose budget and administration are separate from those of the government, but in which the government has more than 50 percent of the capital shares or voting rights.  Appropriations for SOEs are included in public budgets, and SOEs can take two forms, either public or private law entities. Public law entities are recognized as legal personalities whose goal, tasks, and organization are established and defined via specific acts of legislation, with the best-known example being the publicly-owned promotional bank KfW (Kreditanstalt für Wiederaufbau).  The government can also resort to ownership or participation in an entity governed by private law if the following conditions are met: doing so fulfills an important state interest, there is no better or more economical alternative, the financial responsibility of the federal government is limited, the government has appropriate supervisory influence, yearly reports are published, and such control is approved by the Federal Finance Ministry and the ministry responsible for the subject matter.

Government oversight of SOEs is decentralized and handled by the ministry with the appropriate technical area of expertise.  The primary goal of such involvement is promoting public interests rather than generating profits. The government is required to close its ownership stake in a private entity if tasks change or technological progress provides more effective alternatives, though certain areas, particularly science and culture, remain permanent core government obligations.  German SOEs are subject to the same taxes and the same value added tax rebate policies as their private sector competitors. There are no laws or rules that seek to ensure a primary or leading role for SOEs in certain sectors or industries. Private enterprises have the same access to financing as SOEs, including access to state-owned banks such as KfW.

The Federal Statistics Office maintains a database of SOEs from all three levels of government (federal, state, and municipal) listing a total of 16,833 entities for 2016, or 0.5 percent of the total 3.5 million companies in Germany.  SOEs in 2016 had €547 billion in revenue and €529 billion in expenditures. Almost 40 percent of SOEs’ revenue was generated by water and energy suppliers, 13 percent by health and social services, and 12 percent by transportation-related entities.  Measured by number of companies rather than size, 88 percent of SOEs are owned by municipalities, 10 percent are owned by Germany’s 16 states, and 2 percent are owned by the federal government.

The Federal Finance Ministry is required to publish a detailed annual report on public funds, institutions, and companies in which the federal government has direct participation (including a minority share), or an indirect participation greater than 25 percent and with a nominal capital share worth more than €50,000.  The federal government held a direct participation in 106 companies and an indirect participation in 469 companies at the end of 2016, most prominently Deutsche Bahn (100 percent share), Deutsche Telekom (32 percent share), and Deutsche Post (21 percent share). Federal government ownership is concentrated in the areas of science, infrastructure, administration/increasing efficiency, economic development, defense, development policy, culture.  As the result of federal financial assistance packages from the federally-controlled Financial Market Stability Fund during the global financial crisis of 2008-9, the federal government still has a partial stake in several commercial banks, including a 15.6 percent share in Commerzbank, Germany’s second largest commercial bank. The 2017 annual report (with 2016 data) can be found here:

https://www.bundesfinanzministerium.de/Content/DE/Standardartikel/Themen/Bundesvermoegen/
Privatisierungs_und_Beteiligungspolitik/Beteiligungspolitik/Beteiligungsberichte/beteiligungsbericht-des-bundes-2017.pdf?__blob=publicationFile&v=7
 

Publicly-owned banks also constitute one of the three pillars of Germany’s banking system (cooperative and commercial banks are the other two).  Germany’s savings banks are mainly owned by the municipalities, while the so-called Landesbanken are typically owned by regional savings bank associations and the state governments.  There are also many state-owned promotional/development banks which have taken on larger governmental roles in financing infrastructure. This increased role removes expenditures from public budgets, particularly helpful in light of Germany’s balanced budget rules, which go into effect for the states in 2020.

A longstanding, prominent case of a partially state-owned enterprise is automotive manufacturer Volkswagen, in which the state of Lower Saxony owns the fourth-largest share in the company at 12.7 percent share, but controls 20 percent of the voting rights.  The so-called Volkswagen Law, passed in 1960, limited individual shareholder’s voting rights in Volkswagen to a maximum of 20 percent regardless of the actual number of shares owned, so that Lower Saxony could veto any takeover attempts. In 2005, the European Commission successfully sued Germany at the European Court of Justice (ECJ), claiming the law impeded the free flow of capital.  The law was subsequently amended to remove the cap on voting rights, but Lower Saxony’s 20 percent share of voting rights was maintained, preserving its ability to block hostile takeovers.

The wholly federal government-owned railway company, Deutsche Bahn, was cleared by the European Commission in 2013 of allegations of abusing its dominant market position after Deutsche Bahn implemented a new, competitive pricing system.  A similar case brought by the German Federal Cartel Office against Deutsche Bahn was terminated in May 2016 after the company implemented a new pricing system.

Privatization Program

Germany does not have any privatization programs at this time.  German authorities treat foreigners equally in privatizations.

10. Political and Security Environment

Political acts of violence against either foreign or domestic business enterprises are extremely rare.  Isolated cases of violence directed at certain minorities and asylum seekers have not targeted U.S. investments or investors.

Russia

1. Openness To, and Restrictions Upon, Foreign Investment

Policies Towards Foreign Direct Investment

The Ministry of Economic Development (MED) is responsible for overseeing investment policy in Russia. The Foreign Investment Advisory Council (FIAC), established in 1994, is chaired by the Prime Minister and currently includes 53 international company members and four companies as observers. The FIAC allows select foreign investors to directly present their views on improving the investment climate in Russia, and advises the government on regulatory rule-making. Russia’s basic legal framework governing investment includes 1) Law 160-FZ, July 9, 1999, “On Foreign Investment in the Russian Federation”; 2) Law No. 39-FZ,  February 25, 1999, “On Investment Activity in the Russian Federation in the Form of Capital Investment”; 3) Law No. 57-FZ, April 29, 2008, “Foreign Investments in Companies Having Strategic Importance for State Security and Defense”; and 2) the Law of the RSFSR No. 1488-1, June 26, 1991, “On Investment Activity in the Russian Soviet Federative Socialist Republic (RSFSR).” This framework nominally attempts to guarantee equal rights for foreign and local investors in Russia. However, exemptions are permitted when it is deemed necessary to protect the Russian constitution, morality, health, human rights, and national security or defense, and to promote the socioeconomic development of Russia. Foreign investors may freely use their revenues and profits obtained from Russia-based investments for any purpose provided they do not violate Russian law.

Limits on Foreign Control and Right to Private Ownership and Establishment

Russian law places two primary restrictions on land ownership by foreigners. First are restrictions on foreign ownership of land located in border areas or other “sensitive territories.” The second restricts foreign ownership of agricultural land: foreign individuals and companies, persons without citizenship, and agricultural companies more than 50-percent foreign-owned may hold agricultural land through leasehold right. As an alternative to agricultural land ownership, foreign companies typically lease land for up to 49 years, the maximum legally allowed.

President Vladimir Putin signed in October 2014 the law “On Mass Media,” which took effect on January 1, 2015, and restricts foreign ownership of any Russian media company to 20 percent (the previous law applied a 50 percent limit only to Russia’s broadcast sector). U.S. stakeholders have also raised concerns about similar limits on foreign direct investments in the mining and mineral extraction sectors; they describe the licensing regime as non-transparent and unpredictable as well.  In December 2018, the State Duma approved in its first reading a draft bill introducing new restrictions on online news aggregation services. If adopted, foreign companies, including international organizations and individuals, would be limited to a maximum of 20 percent ownership interest in Russian news aggregator websites.

Russia’s Commission on Control of Foreign Investment (Commission) was established in 2008 to monitor foreign investment in strategic sectors in accordance with the SSL. Between 2008 and 2017, the Commission received 484 applications for foreign investment, 229 of which were reviewed, according to the Federal Antimonopoly Service (FAS). Of those 229, the Commission granted preliminary approval for 216 (94 percent approval rate), rejected 13, and found that 193 did not require approval. (See https://fas.gov.ru/p/presentations/86). In 2018, the Commission reviewed 24 applications and granted approvals for investments worth RUB 400 billion (USD 6.4 billion).  International organizations, foreign states, and the companies they control, are treated as single entities under this law, and with their participation in a strategic business, subject to restrictions applicable to a single foreign entity.

Since January 1, 2019, foreign providers of electronic services to business customers in Russia (B2B e-services) have new Russian value-added tax (VAT) obligations. These include: (1) VAT registration with the Russian tax authorities (even for VAT exempt e-services); (2) invoice requirements; and (3) VAT reporting to the Russian tax authorities and VAT remittance rules.

Other Investment Policy Reviews

The WTO conducted the first Trade Policy Review of the Russian Federation in September 2016. Reports relating to the review are available at: https://www.wto.org/english/tratop_e/tpr_e/tp445_e.htm  .

The United Nations Conference on Trade and Development (UNCTAD) issues an annual review of investment and new industrial policies: https://unctad.org/sections/dite_dir/docs/wir2018/wir18_fs_ru_en.pdf  and an investment policy monitor: https://investmentpolicyhub.unctad.org/IPM 

Business Facilitation

The Agency for Strategic Initiatives (ASI) was created by President Putin in 2011 to increase innovation and reduce bureaucracy. Since 2014, ASI has released an annual ranking of Russia’s regions in terms of the relative competitiveness of their investment climates, and provides potential investors with important information about regions most open to foreign investment. ASI provides a benchmark to compare regions, the “Regional Investment Standard,” and thus has stimulated competition between regions, causing an overall improved investment climate in Russia. See https://asi.ru/investclimate/rating/ (in Russian). The Federal Tax Service (FTS) operates Russia’s business registration website: www.nalog.ru.Per law (Article 13 of Law 129-FZ of 2001), a company must register with a local FTS office within 30 days of launching a new business, and he business registration process must not take more than three days, according to. Foreign companies may be required to notarize the originals of incorporation documents included in the application package. To establish a business in Russia, a company must pay a registration fee of RUB 4,000 and register with the FTS. Starting January 1, 2019, a registration fee waived for online submission of incorporation documents.  See http://www.doingbusiness.org/data/exploreeconomies/russia .

The Russian government established in 2010 an ombudsman for investor rights protection to act as partner and guarantor of investors, large and small, and as referee in pre-court mediation facilitation. The First Deputy Prime Minister was appointed as the first federal ombudsman. In 2011, ombudsmen were established at the regional level, with a deputy of the Representative of the President acting as ombudsman in each of the seven federal districts. The ombudsman’s secretariat, located in the Ministry of Economic Development, attempts to facilitate the resolution of disputes between parties. Cases are initiated with the filing of a complaint by an investor (by e-mail, phone or letter), followed by the search for a solution among the parties concerned. According to the breakdown of problems reported to the ombudsman, the majority of cases are related to administrative barriers, discrimination of companies, exceeding of authority by public officials, customs regulations, and property rights protection.

In June 2012, a new mechanism for protection of entrepreneur’s rights was established. Boris Titov, the head of the business organization “Delovaya Rossia” was appointed as the Presidential Commissioner for Entrepreneur’s Rights.

In 2018, Russia implemented four reforms that increased its score in World Bank’s Doing Business ranking. First, Russia made the process of obtaining a building permit faster by reducing the time needed to obtain construction and occupancy permits.  Russia also increased quality control during construction by introducing risk-based inspections. Second, it made getting electricity faster by imposing new deadlines for connection procedures and by upgrading the utility’s single window as well as its internal processes. Getting electricity was also made cheaper by reducing the costs to obtain a connection to the electric network. Third, Russia made paying taxes less costly by allowing a higher tax depreciation rate for fixed assets. Fourth, Russia made trading across borders easier by prioritizing online customs clearance and introducing shortened time limits for its automated completion.

Outward Investment

The Russian government does not restrict Russian investors from investing abroad. In effect since 2015, Russia’s “de-offshorization law” (376-FZ) requires that Russian tax residents notify the government about their overseas assets, potentially subjecting these to Russian taxes.

While there are no restrictions on the distribution of profits to a nonresident entity, some foreign currency control restrictions apply to Russian residents (both companies and individuals), and to foreign currency transactions. As of January 1, 2018, all Russian citizens and foreign holders of Russian residence permits are considered Russian “currency control residents.” These “residents” are required to notify the tax authorities when a foreign bank account is opened, changed, or closed and when there is a movement of funds in a foreign bank account. Individuals who have spent less than 183 days in Russia during the reporting period are exempt from the reporting requirements and the restrictions on the use of foreign bank accounts.

2. Bilateral Investment Agreements and Taxation Treaties

Russia is party to some 63 treaties in force which contain investment provisions. For a full list, see http://investmentpolicyhub.unctad.org/IIA . Russia is a signatory but has never ratified, and ultimately terminated, its application to the European Energy Charter Treaty, which includes a mechanism for investor-state dispute settlement.

Four regional integration agreements include the Eurasian Economic Union (EAEU) treaty (with Armenia, Belarus, Kazakhstan, and Kyrgyzstan), the Belarus-Kazakhstan-Russia agreement on services and investment, the Common Economic Zone Agreement (with Belarus, Kazakhstan, Ukraine), and the European Union-Russia Partnership and Cooperation Agreement (PCA). As a member of the EAEU, Russia is party to the EAEU-Vietnam Free Trade Agreement (FTA), which contains investment provisions. Individual member countries of the EAEU generally retain authority to enter into their own bilateral investment treaties.  In January 2018, the EAEU and India announced plans to sign an FTA in the near future. The EAEU is also negotiating FTAs with other countries, including Singapore, and Turkey. An interim three-year free trade agreement (IFTA) between EAEU and Iran was signed in May 2018. This IFTA came into force in early 2019, and reduces or eliminates tariffs on certain goods – accounting for roughly 50 percent of trade between the parties. In May 2018, the EAEU and China signed an agreement on trade and economic cooperation.

The United States and Russia signed a bilateral investment treaty (BIT) in 1992. However, it was never ratified by Russia and is not in force. A U.S.-Russian dialogue to explore prospects for negotiating a new BIT ceased upon Russia’s purported annexation of Crimea in 2014. As such, investors from the two countries have no protections beyond domestic laws.

The U.S.-Russia Income Tax Convention, in effect since 1994, was designed to address the issue of double taxation and fiscal evasion with respect to taxes on income and capital. The treaty is available at https://www.irs.gov/pub/irs-trty/russia.pdf . In total, Russia is party to 82 double taxation treaties. The Russian Ministry of Finance’s list (in Russian) is available at http://minfin.ru/ru/document/?id_4=117045 .

4. Industrial Policies

Investment Incentives

Since 2005, Russia’s industrial investment incentive regime has granted tax breaks and other government incentives to foreign companies in certain sectors in exchange for producing locally. As part of its WTO Protocol, Russia agreed to eliminate the elements of this regime that are inconsistent with the Trade-Related Investment Measures TRIMS Agreement by July 2018. The TRIMS Agreement requires elimination of measures such as those that require or provide benefits for the use of domestically produced goods (local content requirements), or measures that restrict a firm’s imports to an amount related to its exports or related to the amount of foreign exchange a firm earns (trade balancing requirements). Russia notified the WTO that it had terminated these automotive investment incentive programs as of July 1, 2018. However, shortly thereafter, the Ministry of Industry and Trade announced that it would provide support to automotive manufacturers if they meet certain production quotas and local content requirements. The government is developing a new points-based system to estimate vehicle localization levels to determine original Equipment Manufacturer (OEM)’s eligibility for Russian state support.  The government will provide state support only to OEMs whose finished vehicles are deemed to be of Russian origin, which will depend upon them scoring at least 2,000 points under the new system to get some assistance and 6,000 point to enjoy a full range of support measures. Points will be awarded for localizing the supply of certain components.

The government also introduced Special Investment Contracts (SPIC) as an alternative incentive program in 2015. On December 18, 2017, the government changed the rules for concluding SPIC, to increase investment in Russia by offering tax incentives and simplified procedures for government interactions. These contracts, generally negotiated with and signed by the Ministry of Industry and Trade, ostensibly allow for the inclusion of foreign companies in Russia’s import substitution programs by providing access to certain subsidies to foreign producers if local production is established. In principle, these contracts may also aid in expediting customs procedures. In practice, however, reports suggest even companies that sign such contracts find their business hampered by policies biased in favor of local producers. The amendments aim to improve the SPIC mechanism by clarifying investment requirements and necessary documentation. They also provide a timeframe and procedures for application review, and for amending or terminating a SPIC. Finally, the amendments allow for broader composition of the SPIC private partner: the investor may now procure not only manufacturing services, but also engineering, distribution, and financial services, among others.

The Russian Direct Investment Fund (RDIF) was established in 2011 as a state-backed private equity fund to operate with long term financial and strategic investors and by offering co-financing for foreign investments directed at the modernization of the Russian economy. RDIF participates in projects estimated from USD 50 to USD 500 million, with a share in the project not exceeding 50 percent. RDIF has attracted long-term foreign capital investments totaling more than USD 40 billion in the following sectors: energy, energy saving technologies, telecommunications, healthcare and other areas. RDIF has also developed a system for foreign co-investment in its projects that allows foreign investors to participate automatically in each RDIF project.

Foreign Trade Zones/Free Ports/Trade Facilitation

Russia continues to promote the use of high-tech parks, special economic zones, and industrial clusters, which offer additional tax and infrastructure incentives to attract investment. “Resident companies” can receive a broad range of benefits, including exemption from profit tax, value-added tax, property tax, import duties, and partial exemption from social fund payments. The government evaluates and grants funding for investments on a yearly basis.

Russia has 25 special economic zones (SEZs), which fall in one of four categories: industrial and production zones; technology and innovation zones; tourist and recreation zones; and port zones. As of January 2018, 15 U.S. companies are working in Russian SEZs. According to Russian data, U.S. investors had invested over USD 1 billion in SEZs as of October 2018, making the U.S. the second largest investor in Russian SEZs.  A Russian Audit Chamber investigation of SEZs in April 2017 found the zones have had no measurable impact on the Russian economy since they were founded in 2005. “Territories of Advanced Development,” a separate but similar program, was launched in 2015 with plans to create areas with preferential tax treatment and simplified government procedures in Siberia, Kaliningrad, and the Russian Far East. In May 2016, President Putin ordered work on 10 existing SEZ’s to cease and suspended the creation of any new SEZs, at least until a more integrated approach to SEZ’s and “Territories of Advanced Development” was put in place.

Performance and Data Localization Requirements

Russian law generally does not impose performance requirements, and they are not widely included as part of private contracts in Russia. Some have appeared, however, in the agreements of large multinational companies investing in natural resources and in production-sharing legislation. There are no formal requirements for offsets in foreign investments. Since approval for investments in Russia can depend on relationships with government officials and on a firm’s demonstration of its commitment to the Russian market, these conditions may result in offsets in practice.

In certain sectors, the Russian government has pressed for localization and increased local content. For example, in a bid to boost high-tech manufacturing in the renewable energy sector, Russia guarantees a 12 percent profit over 15 years for windfarms using turbines with at least 65 percent local content. Russia is currently considering local content requirements for industries that have high percentages of government procurement, such as medical devices and pharmaceuticals. Russia is not a signatory to the WTO’s Government Procurement Agreement. Consequently, restrictions on public procurement have been a major avenue for Russia to implement localization requirements without running afoul of international commitments.

Russia’s data storage provisions (the “Yarovaya law”) took effect on July 1, 2018, with providers being required to store data in “full volume” beginning October 1, 2018. The Yarovaya law requires domestic telecoms and ISPs to store all customers’ voice calls and texts for six months; ISPs must store data traffic for one month. The Yarovaya law initially required even longer retention with a shorter implementation window, which companies criticized as costly and unworkable.

The Central Bank of Russia has imposed caps on the percentage of foreign employees in foreign banks’ subsidiaries. The ratio of Russian employees in a subsidiary of a foreign bank is set at less than 75 percent. If the executive of the subsidiary is a non-resident of Russia, at least 50 percent of the bank’s managing body should be Russian citizens.

7. State-Owned Enterprises

Russia does not have a unified definition of a state-owned enterprise (SOE). However, analysts define SOEs as enterprises where the state has significant control, through full, majority, or at least significant minority ownership. The OECD defines material minority ownership as 10 percent of voting shares, while under Russian legislation, a minority shareholder would need 25 percent plus one share to exercise significant control, such as block shareholder resolutions to the charter, make decisions on reorganization or liquidation, increase in the number of authorized shares, or approve certain major transactions. SOEs are subdivided into four main categories: 1) unitary enterprises (federal or municipal that are fully owned by the government), of which there are 862 unitary enterprises owned by the federal government as of January 1, 2018. 2) other state-owned enterprises where government holds a stake of which there are 1,130 joint-stock companies owned by the federal government as of January 1, 2018 – such as Sberbank, the biggest Russian retail bank (over 50 percent is owned by the government); 3) natural monopolies, such as Russian Railways; and 4) state corporations (usually a giant conglomerate of companies) such as Rostec and Vnesheconombank (VEB). There are currently six state corporations. Nevertheless, the number of federal government-owned “unitary enterprises” declined by 22.2 percent in 2017, according to the Federal Agency for State Property Management, while the number of joint-stock companies with state participation declined by 20.2 percent in the same period.

SOE procurement rules are non-transparent and use informal pressure by government officials to discriminate against foreign goods and services. Sole-source procurement by Russia’s SOEs increased to 45.5 percent in 2018, or to 37.7 percent in value terms, according to a study by the non-state “National Procurement Transparency Rating” analytical center.  The current Russian government policy of import substitution mandates numerous requirements for localization of production of certain types of machinery, equipment, and goods.

Privatization Program

The Russian government and its SOEs dominate the economy. The government approved in early 2017 a new 2017-19 plan identifying state-controlled assets of Sovcomflot, Alrosa, Novorossiysk Commercial Seaport, and United Grain Company for privatization. The plan would also reduce the state’s share in VTB, one of Russia’s largest banks, from over 60 percent to 25 percent plus one share within three years. However, citing unfavorable market conditions, the government once again put on hold privatization of Russia’s largest SOEs and sold none of its largest companies slated for privatization in 2017-2019. As a result, the total privatization revenues received in 2018 reached only RUB 2.44 billion (USD 39 million), down 58 percent compared to 2017.

10. Political and Security Environment

Political freedom continues to be limited by restrictions on the fundamental freedoms of expression, assembly, and association and crackdowns on political opposition, independent media, and civil society. In the aftermath of Russia’s attempted annexation of Crimea in March 2014, nationalist rhetoric increased markedly. Russian laws give the government the authority to label NGOs as “foreign agents” if they receive foreign funding, greatly restricting the activities of these organizations. Since the law’s enactment, more than 150 NGOs have been labelled foreign agents. A law enacted in May 2015 authorizes the government to designate a foreign organization as “undesirable” if it is deemed to pose a threat to national security or national interests. Fourteen foreign organizations currently have this designation and are banned from operations in Russia.

According to the Russian press, 7,700 individuals were convicted of economic crimes in 2018; the Russian business community alleges many of these cases were the result of commercial disputes.  Potential investors should be aware of the risk of commercial disputes being criminalized. In Chechnya, Ingushetia, and Dagestan in the northern Caucasus region, Russia continues to battle resilient separatists who increasingly ally themselves with ISIS. These jurisdictions and neighboring regions in the northern Caucasus have a high risk of violence and kidnapping. Since December 2016, the number of terror attacks in Chechnya claimed by ISIS has increased markedly, as have counterterror military operations. Chechens and other North Caucasus natives have joined the ranks of ISIS fighters by the thousands, and the group has issued threats against Chechen and Russian targets. In the past, ISIS affiliated cells have carried out attacks in major Russian cities, including Moscow and St. Petersburg. In 2016, Russian law enforcement reportedly thwarted planned ISIS cell attacks in both cities.

Public protests continue to occur sporadically in Moscow and other cities. Authorities frequently refuse to grant permits for opposition protests, and there is usually a heavy police presence at demonstrations. Large-scale protests took place on March 26, 2017, when tens of thousands of people took to the streets in coordinated demonstrations in Moscow, St. Petersburg, and dozens of other cities across Russia to protest government corruption. Police arrested more than 1,000 people.

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The Lessons of 1989: Freedom and Our Future