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. Last Updated: 07/27/2016

Investment Law Backs Foreigners

One of the most significant distinctions of Russia's new Law on Foreign Investments as compared to the 1991 Law on Foreign Investments is that a major emphasis has been placed on "state guarantees" for the protection of foreign investors.

This legislative shift is due mainly to the fact that the old foreign investment law dates back to the Soviet era, when the country had not developed any commercial legislation related to a market economy. Today, with Russia's more sophisticated commercial, tax and customs legislation, the primary goal of the new law is to introduce practical, useful and detailed guarantees for foreign investors in Russia.

The most important guarantee introduced by the new law is the "grandfather clause," which protects foreign investors from any unfavorable changes in tax, customs and other laws during the term of the recovery of their investment. This guarantee applies to both: 1. an enterprise in which foreign investors hold more than 25 percent of the charter capital; and 2. an enterprise with foreign investment that carries out a "priority investment project," regardless of the percentage of foreign investment in the charter capital.

For those qualifying investments, under the new law, if new legislation is introduced that changes customs duties, federal taxes or contributions to non-budgetary funds in a way that: 1. increases the aggregate tax burden on a foreign investor or an enterprise with foreign investment; or 2. establishes a regime of prohibitions or limitations on foreign investment different from that in effect on the day when a foreign investor commenced its financing of a project carried out by an enterprise, then the new legislation will not apply to that foreign investor or enterprise until the amount of the investment has been recovered. The law itself provides for a maximum of seven years of protection (although a shorter period is possible). In certain exceptional cases, the Russian government can extend this period beyond seven years.

Nevertheless, the grandfather clause does not apply to adverse legislative changes required to protect Russia's economic interests, excise taxes, value-added tax on goods produced in Russia or pension fund contributions, as well as in certain other cases.

With such a new concept of "state guarantees" being introduced in the new law, only time will tell whether Russian authorities will enforce these guarantees in concrete situations.

James T. Hitch and Igor Gorchakov work at Baker & McKenzie's St. Petersburg office.