Special rules for taxation of investments in Belarus

04.07.2013 tax

Special economic zones, Hi-Tech Park Belarus, and the China-Belarus Industrial Park are just a few of the projects in Belarus offering highly favourable investment conditions, particularly in the area of taxation.

According to Courtney Fingar, editor in chief of Foreign Direct Investment magazine, Belarus is one of Eastern Europe’s most progressive reformers in the area of business development. A number of reforms have been introduced in recent years to stimulate the country’s economic development and attract foreign investors. The most important include introduction of tax incentive, creation of several special economic zones, opening of Hi-Tech Park Belarus and the China-Belarus Industrial Park, establishment of duty-free zones, simplification of administrative procedures, and reining in of state inspections and supervision. Moreover, thanks to establishment of the Customs Union of Belarus, Kazakhstan and Russia, which has been in operation since 2010, businesses in Belarus have obtained access to a huge sales market of 170 million people.

Major Polish investors already operating in Belarus include such firms as Inco-Food, Idea Bank, construction materials company Tajfun, furniture manufacturer Black Red White, and food producer Mispol.

One of the best examples of successful cooperation in Belarus is provided by the Polish construction materials group Atlas. Originally, in 2005, it opened a factory in Dubna, near Moscow, at a cost of USD 5 million. Unfortunately, after a year the management board was forced to close the plant because of widespread counterfeiting of the firm’s products. (Two types of Atlas glue were offered at bazaars in Russia: the genuine one for RUB 500 and a fake version in identical packaging for half the price.) Atlas then decided to move its operations to Belarus. The investment in Belarus proved highly successful, with sales increasing from 140,000 tonnes of products in 2009 to 220,000 tonnes in 2012. Recently the group build a new plant outside Grodno for EUR 10 million, and currently it plans to open another facility near Minsk.

Polish investments in Belarus are also encouraged by favourable tax treatment under the tax treaty between the two countries. For example, dividends in Belarus are generally subject to a flat-rate income tax of 12%, but under the treaty the tax on dividends paid to Polish tax residents may not exceed 10% if the taxpayer holds over 30% of the capital of the company paying the dividend. (In other cases, under the treaty, the tax may not exceed 15% of the gross amount of the dividend, and thus in practice is subject to the general rate of 12%.)

Tax breaks for investments in less populous areas

In order to stimulate business in small and medium-sized locales, the Belarusian authorities have implemented an investment programme including a number of tax breaks and duty-free imports in such areas. These areas cover most of the country, with the exception of the cities of Babruysk, Baranovichi, Barysaw, Brest, Gomel, Grodno, Lida, Maladzyechna, Mazyr, Minsk, Mogilev, Navapolatsk, Orsha, Pinsk, Polotsk, Rechytsa, Salihorsk, Slutsk, Svietlahorsk, Vitebsk, Zhlobin and Zhodzina.

Tax relief and other incentives for businesses investing in small and medium-sized towns include such items as:

Exemption from income tax (18%) for 7 years following registration of the business
Exemption from real estate tax (1%) for 7 years following registration of the business
Exemption from stamp duty for issuance or extension of any licences and permits, for 7 years following registration of the business
Exemption from the tax on sale of foreign currencies (30%) for 7 years following registration of the business
Exemption from import duties and VAT (20%) on imports of certain goods contributed in-kind to the share capital of a company (such as equipment, constructions, tools, machinery and vehicles, falling under certain Customs Union classifications)
The option to pay the purchase price for developed real estate acquired from the State Treasury in instalments over 5 years, if the buyer conducts its own production on the site for at least 3 years after purchasing the land
Acquiring tenancy of land without a tender when purchasing developed real estate from the State Treasury.

These incentives are not available for conducting certain types of business, however, such as insurance and banking.

Special economic zones

There are currently six special economic zones operating in Belarus:

Brest SEZ, established in 1996 for a period of 50 years
Gomel-Roton SEZ, established in 1998 for 50 years
Grodnoinvest (Grodno SEZ), established in 2002 for 30 years
Minsk SEZ, established in 1998 for 30 years
Mogilev SEZ, established in 2002 for 30 years
Vitebsk SEZ, established in 1999 for 30 years.

In order to take advantage of all of the privileges offered by the SEZs, the investor must hold “zone residency,” which may be acquired only by a legal person with its registered office within the territory of the SEZ.

The first step in obtaining the status of a zone resident is to prepare a business plan for the investment project, in which the value of the investment may not be less than EUR 1 million and at least 70% of total sales are goods and services exported from Belarus or qualifying as “import substitutes.” (Import substitutes [in Russian, импортозамещающий товар] are goods and services supplied to the domestic Belarusian market by SEZ residents and included in a statutory list updated and approved each year by the Belarusian government. Under Belarusian law, such goods and services must remain on the list for at least three years.)

The next step is to file an application with the administration of the SEZ, together with copies of the company’s corporate registration documents, the business plan, and payment of a filing fee of about EUR 450.

Review of the documents takes no longer than 14 business days, after which the applicant receives a draft agreement on the conditions for operating in the zone. (Sample agreements are available at the websites of the SEZs.) Residency is obtained when the agreement is signed. The agreement is concluded for the length of the investment project included in the application, but may be extended.

Examples of tax incentives and other benefits offered by the special economic zones include:

Total exemption from income tax (18%) for the first 5 years after income is generated, and a 50% exemption for the following 5 years
Exemption from real estate tax (1%)
Reduced VAT (10%) on goods and services qualifying as import substitutes
Exemption from fees (determined in the course of a tender) for the right to conclude a tenancy agreement for land to be developed
Abatement of rent for tenancy of the land for development, for the period of construction but no longer than 5 years
Exemption from VAT (20%) as well as customs fees, anti-dumping fees, and offset fees for import of goods to the duty-free zone (a separate area within the SEZ providing duty-free import of goods)
Exemption from VAT (20%) as well as customs fees, anti-dumping fees, and offset fees for export of goods from the duty-free zone to the territory of the Customs Union in the case of goods of the company’s own production (which are then regarded as originating in the territory of the Customs Union)—this exemption is not applicable to foreign goods
The opportunity to obtain priority financing for construction of technical and transportation infrastructure necessary to implement the company’s investment project, from the resources of the zone or the State Investment Programme—if the investment is for EUR 10 million or more.

The total tax burden in the zone is some 60% of the national average. However, each SEZ resident is required to pay quarterly contributions to a zone development fund, starting from the quarter in which the resident begins its operations. The amount of the contribution is determined individually on the basis of the size of the investment, the number of jobs created, the period for which the agreement is concluded, and other factors.

Hi-Tech Park Belarus

Hi-Tech Park Belarus, promoted as Belarus’s answer to Silicon Valley, was established by government decree in 2005 for development of the IT industry and export of new technologies, and as a magnet for concentration of personnel and investment in the IT sector. The park is located on a site of about 100 hectares in Minsk. There are currently over 100 resident companies operating at the Hi-Tech Park, such as EPAM Systems, Intransition, iTechArt Group, IBA-Gomel-park, Game Stream and IT park.

The park offers the following financial benefits:

Exemption from income tax (18%)
Exemption from VAT (20%)
Exemption from real estate tax (1%)
Exemption from VAT and customs fees on import of technological equipment or parts (including spare parts) for use solely to carry out investment projects in Belarus
A preferential system for payment of social insurance contributions.

As in the case of the special economic zones, a condition for enjoying the privileges offered by the Hi-Tech Park is obtaining the status of a resident of the park. To qualify, the applicant must be a legal person conducting or planning to conduct one or more of the following types of activity:

Analysis, design and programming of IT systems
Data processing using software
Basic or applied research or development work in the natural or technical sciences, or implementation of the results of such research.

In order to obtain residency in the park, an application must be filed together with a business plan and copies of corporate registration documents. After review of the documents (which takes up to one month), an agreement is concluded with the applicant on the conditions for conducting operations in the Hi-Tech Park. A company may register as a resident of the park regardless of where it has its registered office, however. Residents are required to make contributions to the park equal to 1% of their revenue.

Legal persons which do not conduct the activity specified above but are implementing (or planning to implement) business projects in the IT sector aimed at development of programming or ICT are also eligible for the incentives offered by the Hi-Tech Park. A condition for obtaining the tax breaks and other incentives is to register the business project at the park, in the same manner as registration as a resident of the park.

China-Belarus Industrial Park

The China-Belarus Industrial Park is an economic zone established in 2012 for a period of 50 years. It covers an area of 80 km², 25 km from Minsk, near the international airport and the Berlin–Moscow road.

The benefits offered by the park include:

Total exemption from income tax (18%) for the first 10 years and a 50% exemption for the following 10 years
Total exemption from real estate tax (1%) for the first 10 years and a 50% exemption for the following 10 years
Exemption from the tax on sale of foreign currencies (30%) through 1 January 2027
Exemption from VAT (20%) and customs fees on import of goods for use solely to carry out investment projects in the park
Exemption from VAT and real estate tax on the free transfer of land between residents of the park
Total deduction of VAT paid on the purchase of goods and services used for design, construction and fit-out of buildings and other structures within the park
A preferential system for payment of social insurance contributions
The ability to create duty-free zones
A special defensive mechanism—if new fiscal charges are introduced in Belarus, residents of the park will be exempt from them.

In order to enjoy these privileges, a company must obtain residency in the park by filing an application together with copies of corporate registration documents and the investment project with justification. The investment must be for at least USD 5 million and involve development of industry in the field of electronics, chemistry, biotechnology or engineering.

Alina Kalinowska of the Minsk Bar

Przemysław Szymczyk, Real Estate & Construction Practice, Wardyński & Partners