Tatarstan Offers Tax Lure to Investors

The autonomous republic of Tatarstan has introduced a three-year tax holiday for foreign-owned companies and joint ventures, joining a handful of Russian regions that are pioneering the use of local tax breaks to lure foreign investment.


On Jan. 1, Tatarstan will suspend local property and profits taxes for three years for all manufacturing and service companies registered in the republic with at least 30 percent foreign ownership and assets worth at least $1 million, a Tatar official said Thursday.


"We want to attract foreign investors," said the official, who asked not to be named. "The main thing is for them to come here and start working."


Companies will still be subject to a 13-percent federal profit tax, but will reap "significant" savings by avoiding Tatarstan's local profits tax of 22 percent and property tax of at least 2 percent, the official said. Most regions impose a 25 percent profits tax, the maximum allowed by law.


"It marks one of the first occasions when a region of Russia is specifically going out to make itself attractive to outside investors by using the tax system, the way countries do all over the world," said Steve Hasson, senior tax partner with the U.S. consultants Price Waterhouse. "If it spreads that might be a good thing."


When President Boris Yeltsin issued a decree last year giving Russia's administrative regions and republics a measure of autonomy in setting local taxes, most reacted by hiking them as high as possible.


But with high, constantly changing taxes topping the list of obstacles that discourage foreign investment in Russia, some regions are beginning to see that there are other, "more effective" ways to profit from the tax system, said Igor Noskov, who handles taxation of foreign business at the Finance Ministry.


Noskov said that tax holidays like Tatarstan's had been introduced in several other regions, including Kalmykia on the Caspian Sea.


"It's exactly what we expected and hoped for," he said.


Foreign consultants said the tax holiday in oil-rich Tatarstan, a region the size of Portugal about 800 kilometers east of Moscow, was the first they had heard of that offered across-the-board tax breaks to a broad category of companies and was aimed at stimulating regional development rather than creating a tax shelter, as the southern republic of Ingushetia has attempted to do.


Both newcomers and some 160 foreign-owned enterprises in Tatarstan will enjoy the tax breaks introduced in a decree entitled "On the Attraction of Foreign Investment" and signed Oct. 31 by Tatarstan president Mintimer Shaimiyev.


Hasson said the tax breaks would probably not lure large consumer-oriented companies away from major commercial centers, but could encourage more investors to start joint ventures with Tatarstan's giant KaMaZ truck factory or in the oil industry.


John Braden, tax partner at Ernst & Young, said several foreign companies had decided to register in the Moscow and St. Petersburg regions rather than in the cities themselves because taxes were slightly lower in the suburbs.


"It's not a significant difference, but it's enough to influence the decision," he said.