The Free Port of Vladivostok

Georgy Daneliya
Senior associate, Asia Practice, Goltsblat BLP*

On July 13, 2015, President Putin signed the Law on the Free Port of Vladivostok, as well as two other laws introducing revisions to the current laws required to implement the foregoing law (collectively, the “Laws”). Recently, on July 3, 2016, the Law on the Free Port of Vladivostok was amended.

The Laws establish a broad set of incentives for companies that operate as residents of the Free Port of Vladivostok (“Residents”), in particular, significant tax, customs, and other benefits. Note that the title of the Law “On the Free Port of Vladivostok” is figurative and does not limit its geographical scope to the City of Vladivostok, but includes also a number of municipalities in its vicinity, as well as areas around certain sea ports outside of Primorsky Region.

The purpose of the Laws is to boost the social and economic development of the Far East Federal Circuit of the Russian Federation by facilitating investment, cross-border trade, development of transportation infrastructure (including a network of logistical centers), development of exportoriented production facilities.

Below we discuss some of the most important features of the Laws.

General Features

The Free Port of Vladivostok is established for a period of 70 years. This period may be extended by a federal law. Conversely, the Free Port of Vladivostok may be terminated early by a federal law if its existence poses a threat to human lives or health, or to historic or cultural monuments, or if it undermines the defense or security of Russia.

The Free Port of Vladivostok includes the territory of the City of Vladivostok, the Town of Artem, the Town of Bolshoy Kamen, the Port of Nakhodka, the Town of Partizansk, the Town of Spassk-Dalny, the Town of Ussuriysk, as well as the Lazovsky, Nadezhdinsky, Shkotovsky, Oktyabrsky, Olginsky, Partizansky, Pogranichny, Khasansky and Khankaysky municipalities.

Besides, from July 4, 2016, the Free Port of Vladivostok also includes the City of Petropavlovsk-Kamchatsky of Kamchatsky Region, the Town of Vanino of Khabarovsky Region, the Town of Korsakov of Sakhalin Region, and the Town of Pevek of Chukotsky Region.

Sea ports, including their designated water areas, located on the territories of the municipalities set forth above are also included in the Free Port of Vladivostok.

Special economic zones, zones of territorial development and areas of accelerated socioeconomic development located on the municipal areas listed above are not included in the Free Port of Vladivostok.

Management of the Free Port of Vladivostok

The Free Port of Vladivostok is governed by (i) the Supervisory Board of the Free Port of Vladivostok, (ii) the Authorized Federal Body (the Ministry for the Development of the Far East has been designated to perform that function), (iii) the Management Company (Joint-Stock Company “Corporation for the Development of the Far East”), and (iv) the Public Council of the Free Port of Vladivostok.

The Supervisory Board is a collegiate body and is the highest-ranking governing body of the Free Port of Vladivostok. It is presided by the Deputy Prime Minister of the Russian Federation in charge of coordinating the work of federal bodies in the Russian Far East. Members of the Supervisory Board include the Minister for the Development of the Far East, the Governors of Primorsky, Kamchatsky, Khabarovsky, Sakhalin and Chukotsky Regions, Presidents of Legislative Assemblies of the foregoing regions, mayors of towns and municipalities included in the Free Port of Vladivostok, as well as others.

The Supervisory Board exercises general supervision over the business and social activities in the Free Port of Vladivostok, adopts development plans with respect to the Free Port of Vladivostok, sets the maximum number of foreign employees that may be hired by Residents of the Free Port of Vladivostok, sets the list of activities prohibited for Residents of the Free Port of Vladivostok, and performs certain other functions.

The Ministry for the Development of the Far East prepares the procedure for admission of Residents and maintains the register of Residents, supervises the performance by the Managing Company of its duties, as well as performs certain other general functions. It also has certain specific business-related powers, for example, it grants long-term lease rights over federal lands to Residents without an auction, expropriates non-federal lands if needed for the building of infrastructure, establishes easements over non-federal lands, etc.

The Ministry for the Development of the Far East is entitled to delegate some of its powers to the Management Company.

The Public Council is an advisory body, which may be established by the Supervisory Board to assist the Ministry for the Development of the Far East. If established, it is expected to include trade unions, business associations, NGOs, etc.

Certain special powers with respect to the Free Port of Vladivostok are reserved for the Government of the Russian Federation. Thus, the Government may adopt special regulations regarding fishing and fish-processing operations, introduce special licensing requirements for the provision of medical services (including by foreigners) and introduce special licensing requirements for the provision of education pursuant to foreign programs and standards.

Residents

A company or an individual entrepreneur may become a Resident of the Free Port of Vladivostok, if such company or entrepreneur (i) is incorporated/registered on the territory of the Free Port of Vladivostok; and (ii) has concluded an agreement with the Management Company on operations in the Free Port of Vladivostok.

To conclude such an agreement, a candidate has to file with the Management Company an application requesting the conclusion of an agreement accompanied by a set of documents that includes a business plan, as well as specify the land that the candidate needs for its operations.

The Management Company reviews the data in the application and evaluates the business plan to determine whether the candidate and its proposed operations satisfy the applicable criteria. One of the central criteria is whether the volume of planned investment will exceed 5 million rubles within three years from the date of the registration of the applicant as a Resident.

After approval of the candidate and conclusion of an agreement with the Management Company, the candidate is registered as a Resident of the Free Port of Vladivostok.

Benefits

Here are several of the benefits available to Residents of the Free Port of Vladivostok:

• simplified procedures for the lease of federal land lots within the Free Port of Vladivostok (no auction needed);

• tax benefits (see below);

• lower rates of mandatory social insurance contributions payable by a Resident with respect to its employees;

• simplified procedure for the employment of foreign staff (quotas for employment of foreign citizens do not apply; a Resident employer does not need to obtain a special permit allowing it to employ foreigner citizens);

• customs-free zones at sea ports open to international navigation, at international airports, at areas adjacent to border-crossing checkpoints of the Free Port of Vladivostok on motorways and railways. Besides, the Laws introduce certain general benefits available to all persons on the territory of the Free Port of Vladivostok:

• simplified procedures for the approval of design documentation for the construction of buildings and facilities, shortened periods for obtaining building permits;

• implified permitting procedure for the development of artificial land lots (reclaimed land, artificial islands);

• simplified regime for the issuance of entry visa to foreigners entering Russia through a border checkpoint at the Free Port of Vladivostok, allowing a period of stay of up to eight days.

Tax Benefits

 The Law on Amendments to the Tax Code grants certain tax benefits to Residents of the Free Port of Vladivostok (subject to certain additional criteria applicable to Residents pursuant to the Russian Tax Code).

Thus, for the first five years after a Resident that satisfies the above criteria generates its first profit from operations in the Free Port of Vladivostok, or from the fourth year after it became a Resident (if no profit has been generated by then) such Resident is released from the obligation to pay the portion of company profit tax payable to the federal budget, and its obligation to pay the portion of company profit tax payable to the budget of the respective region may not exceed 5 percent.

For the subsequent five years, the Resident will pay the 2 percent profit tax payable to the federal budget, and the portion of company profit tax payable to the budget of the respective region will be in the range of 10 percent to 18 percent.

Besides, the Residents of the Free Port of Vladivostok are released in Primorsky Region from the obligation to pay the property tax payable to the budget of Primorsky Region for the first five years from the month when the respective property was placed on the Resident’s balance sheet. For the subsequent five years, the property tax rate will be 0.5 percent.

Customs-free Zone

Certain customs benefits are provided to the Residents of the Free Port of Vladivostok through the establishment of a customs-free zone.

The Law on the Free Port of Vladivostok directly grants the status of a customs-free zone only to sea ports within the Free Port of Vladivostok that are open to international navigation, and to international airports located within the Free Port of Vladivostok (currently only Knevichi Airport). Pursuant to the decision of the Supervisory Board, the status of “customs-free special port zone” may be conferred to other ports or airport(s), as well as to designated areas adjacent to them.

The Supervisory Board may also establish customs-free special logistics zones at certain areas adjacent to border check-points of the Free Port of Vladivostok on motorways and railways. The foregoing decisions of the Supervisory Board must specify in particular (i) the location and borderlines of the respective customs-free zone, and (ii) the stages and financing for the building of the infrastructure of the areas on which it has been decided to establish a customs-free zone.

 Finally, the Law on the Free Port of Vladivostok provides that a customs-free zone may be established on the land lot in possession of a Resident (whether owned or leased).

* Goltsblat BLP is the Russian practice of Berwin Leighton Paisner (BLP), an award-winning international law firm headquartered in London and with offices operating in major commercial and financial centres throughout the world — Moscow, Abu Dhabi, Beijing, Berlin, Brussels, Dubai, Frankfurt, Hong Kong, Paris, Singapore, Tel Aviv and Yangon. The firm has a team of 100 Russian, English and US law qualified lawyers based in Moscow and over 800 lawyers in the other international offices. Goltsblat BLP currently has over 1300 clients among the major international investors operating in Russia, including 37 Fortune 500 companies.