CHANGES
TO LEGAL REGULATION OF INVESTMENT ACTIVITIES
Based in the analysis of the changes to the federal
and Moscow city legislation, which affected the most
strongly the general investment and business climate in
Russia as a whole and in Moscow as a Russian
Federation's subject, it is possible to conclude that
the new legislative acts adopted during the last two
years in the aforementioned areas can be conventionally
divided into the five following topical groups:
a) separating bureaucracy from economy and removing
unnecessary administrative barriers for the
entrepreneurial activity;
b) regulating the land and real-estate market;
c) protecting rights of owners and investors and
regulating investment activities in the country;
d) improving the taxation system;
e) regulating activities of the banking system and
securities market in the Russian Federation.
Below brief comments on main changes to the national
and Moscow city legislation, which have been made during
the last two years in the aforementioned areas, are
quoted including
1. legislative acts which aim at shaping positive
investment climate in the country and removing
unnecessary administrative barriers for the
entrepreneurial activity (so called laws for the
improvement of regulatory and legal framework for
business in Russia).
It should be stressed that at the beginning 2000 the
Federal Government declared separating bureaucracy from
the economy one of the most important tasks for the
executive power.
Indeed, during the last two years the legislator
adopted a number of new legislative acts which aim at
improving the overall business and investment climate in
the country. The list of such acts includes:
1.1. The federal law No. 129-FZ dated 8 August 2001
“On State Registration of Legal Entities”(came in
force on 1 July 2002).
This law sets a unified procedure for registering
legal entities regardless of their organisational and
legal forms and of the areas of their economic activity
in the unified system of registering bodies and
according to the unified rules which are in effect on
the entire territory of the Russian Federation.
The procedure for submitting documents for
registration has been significantly simplified as
compared to the earlier procedure inasmuch as according
to the new law the applicant can submit the documents
either personally or by mail. The registering bodies are
not allowed to request the applicant to submit any other
documents than those set by this draft law.
According to the new rules, it is the registering
body (and not the applicant) who must inform tax and
other agencies about the legal entity's registration.
1.2. The federal law No. 134-FZ dated 8 August 2001
“On the Protection of Rights of Legal Entities and
Private Entrepreneurs when Carrying out State Control
(Supervision) Procedures” (became operative on 11 August
2001) sets the basic rules for conducting checks by
officials on-site. The new rules aim at decreasing
enterprises' losses related to the activity of control
agencies of the executive power and at reducing
possibilities for the abuse by the officials of the so
called ‘administrative' resource for waging unfair
competition in the interests of some companies.
Among others, this law sets:
- the maximum frequency of the checks which may be
conducted at a single company;
- the mechanism for increasing control over the
companies where violations have been found;
- the mechanism for reducing the intensity of control
for the companies which observe specific conditions.
1.3. The federal law “On Licensing Certain Types of
Business” adopted by the State Duma on 13 July 2001,
which became operative on 10 February , and the
related Decree of the RF Government No. 135 dated
11 February 2002 .
The Decree contains a closed list of licensed
business activity types which has been significantly
reduced. The Decree also establishes a unified licensing
procedure for the entire territory of the Russian
Federation and prohibits using so called reference
norms.
The document stipulates reducing the number of
licensed types of business activity to 104. Among
others, it excludes from the list such type of activity
as leasing performed on the territory of the Russian
Federation by both residents and non-residents. Such
changes to the Russian law will undoubtedly facilitate
the inflow of foreign investments to Russian companies
which purchase equipment abroad using leasing
operations.
1.4. The law of the city of Moscow No. 64 dated
3 October 2001 “On City Planning Norms and Rules for
the City of Moscow”.
The law sets forth the purpose, content and the
procedure for the application of urban development norms
and rules of the city of Moscow when performing city
planning activities in the Russian capital in order to
protect the rights of owners, users and lessees and also
the rights of citizens and legal entities the interests
of which may be affected as a result of violating the
urban development norms and rules.
1.5. The Federal Government plans to implement before
the end of 2003 the following legislative initiatives
which have to further improve the regulatory and legal
framework for business activities in the Russian
Federation:
- to submit the draft federal law “On
Certification” to the State Duma;
- to develop and submit to the State Duma the draft
federal law “On Concessions” ;
- to submit the draft federal law “On Special
Economic Zones in the Russian Federation” to the
State Duma .
2. Legislative regulation of the land and real-estate
markets.
2.1. The overall investment climate in the country
was positively affected by the adoption of the “
Land Code of the Russian Federation ” No. 136-FZ
dated 25 October 2001 which came into force on
30 October 2001.
This law is a basic regulatory norm for the
investment activities in the real-estate area.
2.2. The Russian Federation's Government endorsed by
its Decree No. 660 dated 6 September 2000 “ The
Rules for the Cadaster Division on the Russian
Federation's Territory ” and “ The Rules for
Assigning Cadaster Numbers to Land Lots ” which
facilitated the further improvement of the land-use
system in Russia.
2.3. The federal law No. 143-FZ dated 11 October 2001
“ On Making Changes and Amendments to the Federal
Law “On Mortgage (Real-Estate Pledge) ” which
became operative on 13 November 2001.
This law stipulates that if a real estate object
belonging to the state or municipal property, the
construction of which has not been completed, is
mortgaged the market cots of that property is assessed.
The mortgage bond form has also been changed. According
to the new law, the mortgage bond must contain the money
value of the mortgaged property. In the cases when
mortgaging is required by law, the money value of the
property must be confirmed by the report of a certified
appraiser. If an enterprise is mortgaged, the law
stipulates that in the cases when the evaluation is
mandatory by law the report on the evaluation of
property related to the enterprise is an integral part
of the agreement.
2.4. The Federal Government is currently developing
the following legislative initiatives:
- a new draft law which regulates the land
development procedures and sets forth, among others, the
procedure for forming land lots as real-estate objects
thus protecting the rights of land owners and
facilitating the involvement of land in the civil
turnover;
- a proposal regarding the improvement of the use of
developed indivisible land lots owned by the state;
- a proposal on the legislative regulation of the
process of buy-out by privatised companies of the land
lots on which they are located thus increasing their
investment attractiveness;
- amendments to the Civil Code of the Russian
Federation which stipulates creating and including in
the civil turnover of the so called unified real-estate
object, which is based on the concept of equality
between the rights on the land lot and on the
real-estate located on that land lot, and also making
impossible to include in the civil turnover of the
aforementioned components of the unified real-estate
objects separately from each other.
2.5. The Moscow city Duma is now considering:
- a draft law of the city of Moscow “On the Land Use
and Development in the City of Moscow”.
The law on the land use contains basic concepts and
terms of which an investor or any other legal entity
interested in activities directly related to the
construction (renovation) of objects on the city
territory should be aware. The law also establishes such
new concepts as a territory zone (part of the Moscow
city territory within which urban development rules
unified for all land lots is in effect) and city
planning rules (a document which sets the types of land
lot use and restrictions on the use). The law also
establishes the basis for acquiring and holding
proprietary and other rights on land and for cancelling
such rights.
- a draft law “On Permits for Construction and
Re-construction of Urban Development Objects in the City
of Moscow”.
The law on the permits for the construction and
re-construction of the urban development objects in the
city of Moscow contains a list of concepts to be used by
the parties when obtaining permits and endorsements of
the city authorities, such as: urban development object
and facility; preliminary assessment of urban
development terms for the construction; city planning
justification for the placement and construction of
objects; initial documents and permits needed for the
construction; decision on the construction and permits
for the construction, etc. The law sets forth in detail
the procedures for obtaining permits and the package of
documents needed to start the construction or
reconstruction of an object.
3. Legal protection of the rights of owners and
investors and legislative regulation of the investment
activities in the Russian Federation.
3.1. The federal law No. 120-FZ dated 7 August 2001 “
On Making Changes and Amendments to the Federal Law
“On Joint-Stock Companies ” which came into
force on 1 January 2002 significantly fostered the
legal protection of the rights of shareholders including
the state itself as the shareholder.
3.2. The federal law No. 116-FZ dated 7 August
2001 “On Making Changes and Amendments to the Federal
Law “On Insolvency (Bankruptcy) of Credit Institutions”
has come into force. This law regulates activities
of bankruptcy commissioners appointed to credit
institutions and, mainly, protects the rights of private
depositors (so called first-priority creditors) whose
economic interests were earlier damaged most often
because of credit institutions' bankruptcy.
3.3. Currently the State Duma is considering a new
draft federal law “On Rehabilitation of Insolvent
Enterprises” which stipulates, in particular, the
following:
• simplifying the legal procedure for expropriation
of property from inefficient owners;
• removing opportunities for abuse in the procedure
for expropriating property from the owners of
sustainable enterprises (i.e. legal protection of the
efficient owners' rights);
• creating legal mechanisms for mergers and
acquisitions of inefficient enterprises by efficient
ones i.e. creating mechanism for the direct replacement
of inefficient owners by the efficient ones;
• defining the concept of ‘financial rehabilitation'
which differs from the concept of ‘bankruptcy';
separating the concepts of ‘financial rehabilitation'
and ‘bankruptcy' and legal procedures for ‘financial
rehabilitation' and ‘bankruptcy'.
3.4. The draft federal law “On Nationalisation in the
Russian Federation” (adopted for the consideration by
the State Duma by the decision of the State Duma's
Council No. 16) which, in particular, sets the reasons
for and concepts of nationalisation of private property
in Russia including forced nationalisation and
determines the nationalisation object (an enterprise as
a property unit or part of an enterprise); the draft law
stipulates that a special federal law is to be passed
for each nationalised object.
The adoption of this draft federal law will improve
the investment attractiveness of the Russian Federation
and will ensure rights and legal interests of the owners
and will also prevent carrying our nationalisation in
the interests of particular financial and political
groups.
3.5. The draft federal law No. 105481-3 dated
21 December 2001 “ On Making Changes and Amendments
to the Patent Law of the Russian Federation ”
adopted by the State Duma in the first reading (Decree
No. 2282-III GD).
The adoption of this draft law will create required
conditions for the efficient legal protection of the
rights on intellectual property in Russia thus
facilitating the innovation activities in the country.
The new version of the law significantly increases
attractiveness and safety of patenting inventions in the
Russian Federation inasmuch as it guarantees that the
rights of applicants for patents and of paten holders
will be observed in the country.
The basic provisions of the Patent law will be
modified to comply with the Agreement on Trade-Related
Intellectual Property Rights (TRIPS). Thus the adoption
of this federal law will be a real step to the Russian
Federation's joining to the World Trade Organisation
which fully corresponds to the political and economic
goals of the Russian Federation's Government.
Also the provisions of the federal law “On Copyright
and Adjacent Rights” will be changed to comply with the
Russian Constitution and provisions of the Bern
Convention on the Protection of Pieces of Art and
Literature which is required for the Russian
Federation's joining to TRIPS required for the Russian
Federation's joining to the WTO.
3.6. The federal law “ On Investment Funds ”
No. 156-FZ dated 29 November 2001 is also to facilitate
developing Russian financial institutions and attracting
investments to the production sector of the national
economy.
This law establishes unified standards for regulating
relations in the area of mutual fund investments and
removes some obstacles, which existed earlier for
binding available cash assets on the organised capital
markets in the Russian Federation.
The law establishes specific features for the
creation and legal status of the joint-stock companies
operating in the investment area and also for licensing
activities of mutual investment funds and for their
liquidation.
The law regulates the issues related to the creation
and activities of investment funds; in particular, it
sets the requirements to management companies;
specialised depositary institutions; appraisers; brokers
involved in the distribution and buyout of investment
shares; prospectus for placement of investment shares;
mutual funds' rules; procedures for registration of such
funds and to the investment declaration. The law
determines the procedures for the placement and buyout
of mutual funds' shares and for the calculation of the
investment share cost. It also establishes the
procedures for the calculation of the cost of investment
funds' net assets, requirements for the portfolio of
assets, disclosure of information on the activities of
investment funds and management companies and also the
authority of the state agency regulating the security
market in the area of the activities of professional
brokers in the mutual investment system.
3.7. The draft federal law “ On Business
Accounting ” has been developed. It aims at
implementing a set of measures which improve
transparency of financial reporting of Russian
enterprises. The draft law stipulates the mandatory
preparation and submission by affiliated legal entities
of consolidated accounts and also establishes procedures
for the independent audit of consolidated accounts.
The draft law establishes specific features for
carrying out accounting in the process of re-organising
and liquidating enterprises. The key element of the new
procedures is that according to the draft law all of the
enterprise's assets and liabilities are to be
re-assessed based on the market cost.
In order to ensure improvements in the Russian
companies' investment attractiveness the Russian
Federation's Government has developed a schedule for
implementing international standards of accounting and
financial reporting in the three areas: 1) improving
accounting methods; 2) ensuring trustworthy and
comprehensive disclosure of accounts and 3) further
developing the profession of accounting, training
specialists in accounting and improving their
professional skills.
In accordance with the aforementioned schedule the
transition to accounting based on international
standards is to be finally completed in the Russian
Federation before 2004.
4. Changes to the Tax and Customs Legislation
4.1. Due to coming into force, on 1 January 2002, of
Chapter 25 “ Tax on Income of Enterprises ” in
the New Tax Code significant changes have occurred in
the system of taxing income of enterprises and
organisations. The main changes are as follows: (i)
necessary and justified business expenses can now be
deducted from the taxable base and (ii) certain
restrictions because of which some expenses, including
depreciation expenses, could not be considered, for
taxing purposes, as expenditures are now abolished.
Thus, this law stipulates abolishing the restrictions
in effect which prohibit considering expenses on
advertising; training the production personnel for
operating new equipment and mastering new technologies
implemented in the manufacturing process; expenses on
some types of voluntary insurance, etc. as expenditures
when calculating the taxable base for the tax on income
of enterprises. The law also stipulates expanding
options for deducting expenses for scientific research
and development from the taxable base by using the
mechanism of the capitalisation of expenditures with
their subsequent depreciation and increasing the maximum
amount of the expenses on training the personnel and
improving the personnel's professional skills,
calculated as percentage of other expenditures, when
calculating the taxable base for income tax.
Also, Chapter 25 of the Tax Code envisages reducing
from 1 January 2002 the income-tax rate from 35 % to
24 % and at the same time abolishing all privileges on
income tax which were granted earlier to enterprises.
It should be noted that in relation with coming into
force of Chapter 25 of the new Tax Code the Russian
President on 29 August 2001 signed Decree No. 1088 “
On Making Amendments to and Declaring as Inept Some
Decrees on Foreign Investments Issued by the President
of the RSFSR and the President of the Russian Federation
”.
This decree has abolished the provision according to
which newly adopted legislative acts regulating
activities of foreign and joint ventures in the Russian
Federation, during a three-year period are ineffective
for the already established enterprises. According to
new legislation such legislative acts become operative
in accordance with the general rules established, among
others, by the law on foreign investments in the Russian
Federation.
The provision according to which enterprises with
foreign investments involved in the production
activities are granted privileges for paying income tax
to the federal budget (they pay income tax according to
procedures established for small business companies),
provided that their paid share in the authorised capital
is no less than 30 percent and, equivalently, no less
than 10m USD, has also been declared inept. According to
the new law such enterprises pay income tax similar to
other companies.
4.2. Amendments to the federal law “ On
Production Sharing Agreements ” No. 75-FZ became
operative on 18 June 2001. The new law amends the
provisions of legislation which was in effect earlier
and adds a new taxing scheme for production sharing thus
making it more attractive for foreign investors.
In particular, the law establishes a new procedure
for sharing manufactured products between the state and
investors in addition to the already existing one. This
law establishes a simplified mechanism which stipulates
replacing all taxes and payments by “direct production
sharing” on the basis of the agreement made between the
state and the investor.
Such an approach, in combination with the
stabilisation exception concerning invariability of all
production sharing agreements, which were made earlier,
for the entire period of the filed development, makes it
possible to reduce to the minimum the sovereign risks of
foreign investors which carry out mining operations in
the Russian Federation based on production sharing
agreements and will stimulate an influx of direct
foreign investments to the mining branches of the
Russian economy.
4.3. The Russian Federation's Government on
18 October 2002 issued a Decree “ On Exempting
Technological Facilities (Constituent and Spare Parts
for the Facilities) not Manufactured in the Russian
Federation from Value-Added Tax ”.
This Decree creates additional stimuli for Russian
production companies to make investments in machinery
assets by exempting state-of-the-art technological
equipment, constituent parts, semi-finished products,
etc. imported to Russia from VAT. This is needed to
launch manufacturing of competitive products in the
Russian Federation instead of importing finished
products. This Decree will make modernisation of the
Russian economy more rapid and efficient.
Also, with the same purpose the State Customs
Committee decreed on 1 October 2002 to reduce the import
duty (by five percent) on some types of high-tech
equipment (up to the duty rate of five to ten percent).
5. Legislative Framework Regulating Activities of the
Banking System and Stock Market
5.1. The federal law No. 82-FZ dated 19 June 2001 “
On Making Changes and Amendments to the Federal Law
“On Banks and Banking Activities ” played an
important role in organising and stabilising the Russian
banking system's activities during the post-crisis
period.
Credit institutions were allowed to pay the
authorised capital increment using a foreign currency or
by bank buildings; also a procedure for converting a
credit organisation's liabilities into its participation
in the authorised capital and for making payment to the
authorised capital of credit organisations by government
stocks has been established.
5.2. The further improvement of the banking system's
activities in Russia will be positively affected by the
implementation of International Accounting Standards
which increase the transparency of Russian credit
institutions thus allowing investors to make more
accurate assessments of their financial state.
With this purpose beginning from August 2001 “
Facilitating Accounting and Reporting Reform ”, a
project financed by the European Union's TASIS programme,
and similar US-financed AMP project have been
implemented in the Russian Federation.
These projects mainly aim at improving operations and
increasing transparency of the Russian Federation's
banking system by changing the Russian accounting
standards to comply with the International Accounting
Standards.
The new accounting rules to be used by the Russian
credit organisations have been developed as part of
implementing these projects.
During 2001 and 2002, the developed rules, after
having been tested in eight ‘pilot' banks, will be used
for creating the corresponding regulatory framework.
After the survey stipulated by projects has been
completed the time plan for transferring the Russian
banking system to the International Accounting Standards
will be set.
5.3. A number of regulatory and legislative acts has
been developed for the stock market. These acts
stipulate more stringent administrative and criminal
persecution of stock-market brokers for the violation of
laws and also of heads of organisations for infringing
rights of investors and shareholders.
Thus, on 27 December 2002 amendments were made to the
federal law No. 46-FZ dated 5 March 1999 “ On
Protecting Rights and Legal Interests of Investors on
the Securities Market ”. Also the draft federal law
No. 84807-3 “ On Making Changes and Amendments to
the Criminal Code of the Russian Federation Regarding
More Stringent Criminal Responsibility for Crimes
Committed on the Securities Market ” was adopted by
the State Duma in the first reading (Decree No. 1873-III
GD). These laws establish more severe responsibilities
for the heads of enterprises for submitting
untrustworthy information (or information which misleads
investors) about securities issuers and for other
violations of rules at the securities market; criminal
persecution for such violations of law is also
stipulated.
5.4. In 2002, a law is to be adopted which stipulates
payments to the accumulation part of the mandatory
pension system.
Then the accumulation part of the labour pension will
consist of the social security payments and the
investment revenue accrued on the payments. The rate of
the social security payments to the accumulation part of
the state pension system will not be reduced during the
entire period of the labour activity. The payments based
on the unified social tax to the distributive pension
system will be reduced by the amount of payments made to
the accumulation system.
The pension reserves in the accumulation system
which, according to the most cautious forecasts will
increase to no less than 2bn USD before 2003, will be
invested via the authorised investment companies. Those
companies will be selected on the basis of tenders and
will operate under direct governmental control.
Considerable part of these investment resources is
expected to be invested, after a short time period, to
the stock market thus ensuring a new boost to the
development of the capital market in Russia and
expanding access to long-term investment resources for
the large number of Russian companies.
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