It is noteworthy that stimulating innovation has recently become a top priority of Russian legislators, and this includes tax legislation. For example, tax incentives for innovation activities are marked as one of the main guidelines of Russian tax policy for 2011 and the period planned for 2012 and 20131.
Of course, energy efficiency is one of the most significant areas of innovation currently being developed. In this context, it is difficult to underestimate the role of tax and economic incentives in the implementation and development of energy efficiency and energy saving projects.
However, the incentives to encourage energy efficiency set out in the Russian legislation are quite limited at the moment. Indeed, today three main incentives are provided for by the law: investment tax credits, an increased depreciation coefficient and partial compensation of interest on loans and credits.
At the same time, it is doubtful that one will fully benefit even from those limited tax incentives in the short run due to a number of deficiencies:
- as regards the investment tax credit, there is currently a list of only four types of equipment (condensation cauldrons, thermal pumps, co-generation installations less than 25 MW and LED lamps) eligible for this incentive;
- an increased depreciation coefficient may not be used today due to the fact that the Russian Government bylaw with eligibility conditions for the relevant equipment has not been adopted; and
- the mechanism and procedures for partial compensation of interest are also not fixed and, therefore, remain vague.
In this respect, a federal draft law2 (the “Draft”) that includes new tax incentives for energy efficient equipment was adopted in the third (and final) reading in the Russian State Duma on 11 May 2010.
According to the Draft, companies will now benefit from a corporate property tax exemption on the following assets:
- newly introduced assets with high energy efficiency according to a list of such assets to be adopted by the Russian Government; and
- newly introduced assets having a high energy efficiency class where the definition of an energy efficiency class is obligatory for the relevant objects (this condition will primarily concern household devices and the residential building sector).
Please note that taxpayers may benefit from the tax exemption in question for a period of three years from the date of making the relevant entries in the company’s books.
As a reminder, corporate property tax is currently assessed on both movable and immovable property. Taxable property includes fixed assets and “profitable investments in property” (as defined by Russian accounting standards), and also comprises leased property. At the same time, foreign companies that do not have a permanent establishment in Russia are only taxed on their immovable property. The tax base is the average annual residual value of taxable property for financial reporting purposes, and the rate is set at the regional level but may not exceed 2.2%.
In principle, the Draft should increase interest in the use of energy efficient equipment and implementation of energy saving technologies. However, as its complete entry into force will require adoption of another Government Decree, the practical application of several of its provisions may be delayed and complicated, as the process of adoption of Government Decrees in the energy saving sphere is quite prolonged. On the other hand, the exemption provided for by the Draft applicable to assets with an energy efficiency class will apply immediately after the Draft enters into force.
The provisions of the Draft concerning the tax exemption discussed above, if approved by the Federation Council and signed by the President, will enter into force as from 1 January 2012. We note that the Draft is likely to remain unchanged during the further approval process and, therefore, should be officially published in the near future.