New Laws to Regulate VAT, Securities Market

Forget the June elections. The president and the State Duma are continuing to reach consensus on major laws directly affecting foreign investment. This could become a habit.

The latest laws to be adopted are the Law on Introduction of Changes and Additions to the Law of the Russian Federation on Value Added Tax and the long-awaited (five years) Russian Federation Law on the Securities Market.

The new VAT law on its face is mostly good news for investors although certain key provisions await further clarification -- in particular, provisions which may eliminate tax on inter-company and other loans. Perhaps of most general interest where residents and non-residents are involved are provisions relating to where services are "consumed" or "realized" -- and thus subject to VAT -- and the provisions exempting charter capital contributions.

An exemption for charter capital contributions of a more limited nature existed under earlier legislation, but was repealed last year. The new exemption appears to apply to capital contributions regardless of whether the contribution is an initial contribution or part of an increase on capital.

The new law has also changed the application of VAT conceptually. Prior legislation generally applied VAT to work or services if the latter were performed in the CIS. The new law provides for a series of tests to determine where the services are consumed or realized.

For example, in the case of services -- such as legal, consulting, accounting, transfer of certain intellectual property rights -- the services are deemed to be consumed in the country in which the purchaser carries on economic activities, if the purchaser and provider are located in different countries. Otherwise, work or services connected with movable property may be deemed to be realized where they are carried out; for immovable property, wherever the property is located.

The adoption of the first federal law on securities is of much greater significance. Russian lawmakers have been considering drafts of a law on securities for nearly five years, and were it not for a dynamic group of regulators within the Russian government and the president, there would be no Russian securities market today. The law introduces a definition of "stock" and various other fundamental concepts, and delegates to the Federal Commission on the Securities Market significant powers to regulate market participants, methods of distribution of securities and other key matters traditionally within the mandate of the securities commissions of other developed economies.

Professor William Butler, a partner with White & Case has been practicing CIS law for 30 years; Maryann Gashi-Butler is head of the Moscow office of White & Case.