On November 7 2011 President Medvedev signed the much-discussed Federal Law 305-FZ, which was introduced by the government in May 2011. Despite its unassuming title - the Law on Amending Certain Legislative Acts of the Russian Federation in Connection with Implementation of Measures of State Support for the Shipping and Shipbuilding Industries - it represents another major effort to support the national merchant fleet.

At the start of the 1990s, the Soviet Union boasted one of the largest fleets in the world; however, uncertain times were to follow for the shipping industry. Over the past 20 years the Russian merchant fleet has lost a significant share of the market - in 2010, only around 5% of export and import cargoes to or from Russian ports were carried by vessels flying the Russian flag.

In recent years the government has acknowledged the importance of the national shipping industry and has taken a number of significant steps to revive it. In 2006 the Russian International Register of Ships was introduced. The operations of registered vessels were exempt from corporate profit tax and corporate property tax, and the purchase of a Russian-built vessel intended for registration was exempt from value-added tax (VAT). At present, the register lists around 300 vessels. However, a significant drawback was that registered vessels were restricted to operations in the international carriage of goods or towage and were prohibited from carrying goods in internal trade.

The new law significantly extends this scope of operations. Registered vessels can now undertake:

  • carriage of goods and towage operations between Russian ports;
  • exploration and extraction of non-living resources from the seabed; and
  • hydrotechnical works.

Moreover, registered vessels built in Russian shipyards after January 1 2010 may operate for any other merchant shipping purposes, including fishing, scientific research and sports and leisure, as well as trading on Russia's inland waterways.

The law also introduces the following significant tax benefits:

  • A 0% VAT rate applies to the carriage of import and export goods under time charters;
  • Proceeds from the sale of registered vessels are exempt from corporate income tax;
  • Depreciation will not apply to such vessels; and
  • Salaries and other remuneration paid to crew members of any vessels sailing under the Russian flag will be:
    • considered income from sources in Russia and will be subject to personal income tax at a rate of 13%; and
    • exempt from fees payable to social funds (which could represent up to 34% of the salary and remuneration).

The tax benefits extend not only to shipping companies, but also to shipyards, which may now fall within the regime for special economic zones. This new status makes it possible to enjoy a special customs and tax regime which, in particular, allows for an exemption from import taxes and duties on imported foreign goods, and an exemption from land tax and corporate property tax for 10 years. The new law also authorises the Development Bank to support Russian shipyards by issuing guarantees. This measure, if duly applied, may provide additional support for the nation's shipyards at a troubled time for the international shipbuilding market.

It is hoped that the new law will make the registration of ships under the Russian flag more attractive and encourage new construction in Russia. It is likely to generate additional international interest in the Russian shipping market, particularly from the perspective of international shipping business and financial institutions.

For further information on this topic please contact Alexander Mednikov at Jurinflot International Law Office by telephone (+7 495 792 5701), fax (+7 495 792 5700) or email ([email protected]).