Country Q&A. Russian Federation.


Construction and Projects Handbook 2011/12


1. What are the main trends in the local construction and projects market? What are the most significant deals?

The general trend in 2010 was some upturn in the construction industry, with the number of construction projects increasing and
suspended construction projects restarting. This was a direct result of the economic recovery after the downturn.

Another trend involved more rigorous controls over constructions by supervisory and regulatory authorities. This trend manifested itself in the Supreme Arbitration Court issuing a number of decisions and circulars (that bind all state arbitration courts in Russia), in relation to both the:

  • Status of unauthorised construction.
  • Property rights disputes.

Moscow projects also face tighter requirements. For example:

  • There is a full ban on the construction of retail and office facilities in the city centre.
  • Attempts have been made to effectively resolve traffic issues. The Moscow authorities are more carefully monitoring projects that might aggravate traffic and more stringent requirements on parking facilities have been introduced.
  • There has been some slow-down in the issuance of permits for new construction projects.

Primarily this was caused by almost complete replacement of the former Mayor Hall team including the Mayor himself.


2. Who are the main parties involved in a project?

The main parties involved in a project are the:

  • Developer. The developer is the key party in the overall process.The developer must either own or lease the relevant
    land plot. Generally, the developer engages other professionals, the main ones being a project designer, a general
    contractor/contractors for certain types of works, and a technical employer (engineer).
  • Project designer. This is the professional responsible for preparing the design documentation and, as a rule, organising
    state expert assessment of the design documentation. To elaborate specific sections of the design documentation,
    the designer may engage sub-designers.
  • General contractor. The general contractor’s main role is to provide for the organisation and co-ordination of construction process on site. The general contractor usually also carries out the bulk of the work and for specific work appoints subcontractors.
  • Technical employer. This is the party with expertise in exercising construction supervision (for example, the inspection
    of completed works and their quality).


3. Which are the most common procurement arrangements if the main parties are local? Are these arrangements different if some or all of the main parties are international contractors or consultants?

The developer generally enters into the following agreements when implementing a project:

  • A contract with the designer for development of the design documentation.
  • A construction contract with the general contractor for construction of the facility.
  • A contract with the technical employer for technical supervision over the design and construction, selection and involvement of third parties to implement the project, reporting to the supervising authorities, and so on.

The following forms for transactional relations are also frequently used:

  • A single contract for design and construction. This form is inconvenient due to the requirement for the general contractor
    to have a Certificate of Admission (a type of licence) both for design work and for general contracting work.
  • Construction on a turnkey basis (that is, the facilities are constructed and delivered ready to use) at a fixed price,
    including engineering, procurement and construction (EPC).
  • Agreement on a comprehensive construction management including engineering, procurement and construction management (EPCM).

These arrangements are generally the same if some or all of the  main parties are international contractors or consultants.


4. What transaction structures and corporate vehicles are most commonly used in local projects (when the main parties are based in your jurisdiction)?

The main forms of transactional structures and vehicles are relatively simple:

  • Construction contract. Employment of a construction contractor by a developer.
  • Investment agreement. When a developer engages an investor, an investment agreement is executed. Under this, the
    investor rather than the developer has initial title in the new facility from the outset. This concept is a simplified variation
    of the shared construction concept.
  • Shared construction agreement. This is a heavily regulated variation of the investment agreement. It aims primarily to
    protect the investor’s interests and public order. This type of agreement is mandatory for residential development involving investments by individuals. Companies can agree to use this agreement. However, developers are not enthusiastic about using this agreement, because of the burdensome reporting and liability obligations.
  • Corporate forms. If a special purpose vehicle is created for the purposes of the project, the traditional corporate forms
    are used (that is, either a limited liability company (LLC), or a joint stock company (JSC)).

See also, Question 37.

5. Are the common transaction structures and corporate vehicles different when the main parties are international contractors or consultants?

The transaction structures are generally the same for both local and international contractors or consultants. However, international projects involve more sophisticated corporate and finance structures. In particular, corporate structures managed from a foreign jurisdiction (for example, Cyprus, BVI, Jersey, Guernsey and The Netherlands) are increasingly used. Vertical structures are sometimes used, made up of several special purpose companies, to comply with statutory limitations on foreign involvement.


6. How are projects financed? How do arrangements differ for major international projects?

Before the downturn, most real estate projects were funded through bank loans. Currently, banks and professional investors
provide loans only for the most marketable projects that are close to completion and are valued at more than the loan amount.
Another standard financing method is equity. Initial public offerings (IPOs) are not currently considered, due to the economic situation. In addition, instruments such as mezzanine finance, forward financing and bond issues are currently less common.


7. What forms of security and contractual protections do funders typically require to protect their investments?


Funders typically require that one or several of the following forms of security be used to protect their investments:

  • Mortgage. The most commonly used security is a mortgage over the land plot on which construction is carried out (or a
    mortgage of the lease right if the plot is held on a leasehold basis), together with a mortgage over the construction facility.
  • Pledge. This is a pledge of shares in the company constructing the facility and owning the land, or in that company’s
  • Other forms of security. These include a pledge over assets, a pledge of bank accounts and receivables, bank guarantees and parent company guarantees. In addition, a pledge of the employer’s rights to contract for construction has recently been introduced to secure guarantees. However, this instrument is insufficiently covered under Russian legislation and relevant enforcement practice has not been established.


If the investments drawn into the construction project are subject to foreign law, contractual tools such as warranties, step-in rights and assignments of contractual rights are used.


8. What standard forms of contracts are used for local projects (when the main parties are based in your jurisdiction)? Which organisations publish them?

There are no Russian standard forms of contracts. Major local industrial projects, particularly those financed by foreign banks
and financial organisations, generally use standard forms of contracts developed by the International Federation of Consulting
Engineers (Fédération Internationale Des Ingénieurs-Conseils) (FIDIC). However, these require thorough adaptation to local reporting, tax, and bookkeeping requirements, among others.

9. How do construction contracts for international projects differ from those used for local projects? Which organisations publish them?

Construction contracts for international projects usually consist of FIDIC models adapted to Russian legislation. This applies, in
particular, to infrastructure and industrial projects.


Contractors’ risks

10. What risks are typically allocated to the contractor? How are these risks offset or managed?

The main risk the contractor faces is that of accidental loss of, or accidental damage to, the construction facility before its acceptance by the employer/developer (except in cases where the construction facility is destroyed or damaged because of poor quality material or equipment supplied by the employer, or the execution of incorrect instructions from the employer). This risk is normally managed by taking out insurance.

In relation to the materials and equipment provided by the contractor, the contractor bears the risk of accidental loss or accidental damage, and the risk of being unable to use those materials and equipment in the construction. These risks can also be mitigated by insurance.

If, under the contract with the contractor, the price of the contractor’s work is fixed, the contractor bears the risk of additional
unforeseen costs arising in the course of construction. This applies even in relation to costs that cannot be accurately calculated
when the contract is concluded.

Excluding liability

11. How can liability be excluded or restricted under local law?

Liability for non-performance and bearing of risk are differentiated under law. That is, in the event of force majeure (see Question 13), the contractor is released from liability but continues to bear the risk of accidental loss of, or accidental damage to, the construction facility.

The contractor can limit its liability to the following:

  • Reimbursement of actual damage only (excluding lost profits). As a rule, this restriction is used in the construction of
    large scale industrial facilities, such as power plants.
  • Reimbursement of direct loss only.
  • Liability if found culpable only. Under Russian law, in relations with commercial organisations, liability is usually
    incurred irrespective of fault, unless the parties agree otherwise.

Caps on liability

12. Do the parties usually agree a cap on liability? If yes, how is this usually fixed? What liabilities, if any, are typically not capped?

In most cases, the law does not prohibit the parties from setting a cap on liability, including a fixed amount. However, in practice, a monetary limit is applied very rarely and the parties usually limit their liability by other means (for example, they provide for reimbursement of actual damage only, without covering lost benefits, interest and so on (see Question 11)).

Force majeure

13. Are force majeure exclusions available and enforceable?

Under Russian law, force majeure releases parties from liabilities. Russian law outlines key characteristics that constitute force majeure, but does not list force majeure events specifically. Situations that are urgent and irresistible can constitute force majeure. The following events may be treated as force majeure:

  • Natural disasters.
  • Acts of war.
  • Blockades.
  • Embargoes.
  • Acts of public authorities.
  • Other public events relating to the force majeure circumstances.

In addition, the law specifies circumstances that cannot be considered force majeure, in particular:

  • Breach of duty by, for example, subcontractors and suppliers of materials and equipment.
  • Lack of a sufficient market for supplying the goods, including materials, construction and equipment.
  • Lack of funds.

Material delays

14. What contractual provisions are typically negotiated to cover material delays to the project?

The parties usually establish a penalty for delayed construction.
The penalty can be determined as either a:

  • Percentage of the amount of work not completed on time.
  • Fixed amount for a specific period of delay.

Russian legislation provides for the employer’s right to terminate a contract if the contractor either:

  • Delays commencement of the work.
  • Performs the work so slowly that it is impossible to meet the deadline.

In addition, the contract often provides for the employer’s right to terminate the contract if there is a significant delay in the contractor’s execution of the works. In this case, the employer can also claim damages from the contractor.

Performance bonds, insurance, banks and parent company guarantees are also used in large scale projects.

Material variations

15. How are material variations to the works usually dealt with in the contract?

Construction and related works should be carried out in accordance with the design and technical documentation defining the
scope, content and other related requirements. This should be supplied with a calculation of the cost of works. The employer
has the right to amend the design and technical documentation under the condition that the cost of any additional work caused
by the amendment does not either:

  • Exceed 10% of total costs listed in the calculation.
  • Change the nature of the works under the contract.

Revisions of a greater scope are subject to agreement between the parties.

Other provisions

16. What other main contractual provisions do the parties usually heavily negotiate?

The following terms and conditions are the most heavily negotiated:

  • Costs and payment schedule in relation to the works (for example, advance, interim and final payments).
  • Timing of work performance and liability for failure to meet intermediate deadlines.
  • Parties’ liability for failure to meet contractual terms and conditions. 
  • Order of the conveyance of risks and works acceptance (that is, whether the employer/developer accepts the works and relevant risks phase by phase, or accepts all the works and risks only on completion).


17. How are construction professionals usually appointed? How are their liabilities dealt with in the contract?

If the employer is a commercial organisation, contractors and other construction professionals are usually selected by either a:

  • Binding tender (concurs). The employer and the best bidder must conclude a contract. It is not mandatory to hold a
    tender procedure in relations between commercial organisations, although bidding is frequently used in practice.
  • Non-binding tender (request for proposals). The employer collects proposals from potential contractors, but retains the right to refuse to enter into a contract with the best bidder.

In the public sector, selection of a contractor is usually made on the basis of a binding bidding procedure. The procedure is
usually very formal, strictly regulated and differs from the tender procedures held by commercial organisations.


18. What are the usual methods of payment for construction work? Are there ways for the contractor and consultants to secure payment or mitigate risks of non-payment under local law?

The procedure for paying for construction work is similar in most construction projects and consists of the following:

  • An advance payment (or several advance payment instalments, usually used for site preparation, purchase of
    materials and so on). The advance payment does not usually exceed 10% to 15% of the total cost of the work and is
    usually secured by a bank guarantee. These advances are usually proportionate to the set of subsequent payments.
  • Interim payments for interim works carried out as construction progresses. These payments can be made periodically
    (for example, on a monthly basis, on acceptance/inspection of completed works at the main stages of construction or
    according to a schedule).
  • Retention payable on completion and the employer’s final acceptance of the facility. The size of this retention is usually
    5% to 10% of the total cost of the work.
  • Retention payable on expiry of the guaranteed operating period (usually amounting to no more than 5% to 10% of the
    total cost of the work). This retention generally is replaceable with a bank guarantee in the same amount.


19. How do the parties typically manage their relationships with subcontractors?

The general contractor generally engages subcontractors to perform certain types of work without seeking the employer’s prior
consent. The parties can agree that the general contractor should seek the employer’s prior consent for engaging subcontractors or agree on the list of potential subcontractors in advance. For example, information on approved subcontractors can be specified in the general contractor’s offer for participation in the tender.

In both cases, the general contractor continues to be liable towards the employer for work performed by subcontractors as if it
performed the work itself.

The employer does not usually interfere in the relations between the general contractor and its subcontractors. However, the general contractor and the employer can agree that the employer will employ and pay the subcontractors directly.

In certain cases, subcontractors must have a Certificate of Admission issued by a relevant self-regulating organisation (SRO) (see Questions 3 and 20).


20. What licences and other consents must contractors and construction professionals have to carry out local construction work? Are there any specific licensing requirements for international contractors and construction professionals?

On 1 January 2010, the reform of regulation of construction activities and the transition from licensing of construction activities
to self-regulation was launched. The key regulation governing self-regulation in construction works is the Town Planning Code
of the Russian Federation. Construction work affecting safety can now only be performed by parties holding a Certificate of Admission issued by a relevant SRO (see Question 19). The SRO consists of professional developers. Before the reform, licences were issued by the state agencies.

There are more than 370 types of work requiring a Certificate of Admission, ranging from engineering surveys and preparation of design documentation to specific construction works, and works associated with organising construction.

In most cases, the general contractor, the designers and the technical employer should be members of an appropriate SRO, and
hold a Certificate of Admission issued by one of the relevant SROs.

21. What licences and other consents must a project obtain:

  • Before construction work starts?
  • During construction work?
  • On completion?


Before construction work starts, a project must obtain all of the following:

  • A town-planning plan of the land plot. This is a territorial zoning document identifying the main characteristics of the site,
    including the types of permitted use and permitted construction options. The developer obtains the town-planning plan.
  • The requisite set of design documents and a positive state expert’s opinion on these. This is not required in some minor projects. Usually, the designer organises the state expert’s assessment.
  • The technical conditions for connection to the public utilities infrastructure (that is, electricity, gas, water, waste water and so on).
  • A construction permit issued by local or federal authorities, depending on the project’s scale. The construction permit is
    received by the developer.


During construction, the construction supervisory authority (either regional or federal, depending on the project) makes inspections in accordance with the schedule specifically issued for each construction site. For some minor construction projects, state construction supervision is not carried out.

On completion, a project must obtain all of the following:

  • A report on the facility’s compliance with the requirements of the technical regulations and design documentation (this report is commonly referred to in Russia as a ZOS). The ZOS is issued by a state construction supervisory authority on final inspection. The general contractor usually obtains the ZOS.
  • An operation permit for the facility. This is the main, key document issued to the developer by the state authority or local government, confirming completion of construction and the facility’s capacity to operate.


22. What types of insurance must be maintained by law? Are other non-compulsory types of insurance maintained under contract?

The SROs generally establish insurance requirements. In practice, the parties also agree that additional insurance must be maintained. The duty to maintain insurance is usually imposed on the contractor, although it is sometimes imposed on the employer, for example, when the construction is covered under the employer’s general insurance (including international insurance, primarily if the employer is an organisation that operates in several countries).

The following types of insurance are usually maintained:

  • Insurance of construction risks. This includes the risk of accidental damage to, or accidental loss of, the facility under
    construction and materials, equipment and other property located on the site.
  • Liability insurance for injury caused during the work (third party liability insurance).

SROs require insurance to be maintained as a condition for membership and also to reduce the burden on SRO funds. This is
because, under legislation, an SRO is subject to secondary liability for damage caused by its member and must pay out of its
indemnification fund.


23. Are there any labour law requirements for hiring (local and foreign) employees?

Local workers

Local construction workers must both:

  • Be at least 18 years of age.
  • Pass any relevant health examinations, for example when working in hazardous locations.

There are no other general limitations on the employment of Russian citizens.

Foreign workers

Foreign nationals can be employed if they have a work permit issued by the Federal Migration Service. Work permits are issued for a term not exceeding one year (or three years for highly skilled workers), based on migration quotas that the federal government fixes annually. Quotas do not apply to all highly skilled workers.

A foreign employee is likely to be considered highly skilled if his average annual income is not less than RUB2 million (as at 1
April 2011, US$1 was about RUB28.5).

Foreign nationals can work without a permit if both:

  • They are employed by a foreign company that is engaged in producing or selling goods.
  • Their work involves:
    • equipment installation services;
    • technical support services; or
    • warranty services or technical support for equipment delivered to Russia.

24. Which labour laws are relevant to projects?

The federal Labour Code is the main legislation regulating labour relations. This establishes mandatory requirements on maximum working hours, night work, payments and so on. For example (Labour Code):

  • The normal duration of a working day cannot exceed 40 hours.
  • Salary should be paid at least every two weeks.
  •  Holiday entitlement is at least 28 days per year.

25. Must an employer pay statutory redundancy or other payments at the end of a project? Are all employees eligible?

Employees can be engaged on either a:

  • Fixed-term contract. Under this, there is no statutory payment of compensation on expiry of the fixed term.
  • Indefinite employment contract. Under this, employees can be dismissed by the employer or terminate their own
    employment in cases stipulated by the Labour Code. Depending on the situation, a maximum statutory redundancy
    payment is five months’ wages.


26. Which health and safety laws apply to projects?

Health and safety laws are set out in numerous laws and standards. The main health and safety regulations applicable to construction work are set out in the:

  • Labour Code.
  • Construction Standards and Rules 2-03-2001 on work safety in construction.
  • Sanitary Regulations and Standards This sets out sanitary rules for construction work.
  • Technical regulations on fire safety requirements, established by the federal law dated 22 July 2008 No. 123-FZ.

The employer’s basic obligations are to:

  • Provide working conditions meeting the standards of the occupational health and safety, work and rest regime established by the labour laws.
  • Purchase special clothing for employees’ personal protection.
  • Give technical training for employees on safety.
  • Ensure periodical medical examinations of employees.
  • Ensure testing and certification of workplaces.


27. Which local laws regulate projects’ effects on the environment?

The following local laws, among others, regulate projects’ effects on the environment:

  • Federal law of 10 January 2002 No. 7-FZ “On Environmental Protection”. This is the main piece of legislation.
  • The Land Code, the Town-Planning Code and the Forest Code. These are the main codes containing provisions
    regulating projects’ effects on the environment.
  • Federal law of 14 March 1995 No. 33-FZ “On Natural Areas of Preferential Protection”.
  • Federal law of 4 May 1999 No. 96-FZ “On Protection of Atmospheric Air”.
  • Federal law of 24 July 2002 No. 101-FZ “On Farm Land Turnover”.

28. Must buildings meet carbon emissions or climate change targets?

Russia has no legislation regulating carbon emissions or climate change targets. Russia acceded to the Kyoto Convention in 2010, but application of the Convention will commence after a transitional period of three years, during which the national legislation should be changed.


29. Are there any rules prohibiting corrupt business practices and bribery (particularly any rules targeting the projects
sector)? What are the applicable civil or criminal penalties?


Individuals can by penalised for:

  • Taking bribes. Depending on the circumstances of the crime, punishment can range from a fine to imprisonment
    for a maximum of 12 years.
  • Giving bribes. Depending on the circumstances of the crime, punishment can range from a fine to imprisonment
    for a maximum of eight years.

Legal entities can be held administratively liable with a fine of up to three times the amount of the bribes, but not less than RUB1

In addition, a legal entity’s officers can be criminally prosecuted.

Illegal transfer of money

Illegal transfer of money or any other assets to a company’s manager to take actions in the interests of the transferor is punishable with one of the following:

  • A fine up to RUB200,000.
  • Disqualification for up to two years.
  • Imprisonment for up to three years.

There are no construction-specific corruption laws


30. What rights do the client and funder typically require on the contractor’s bankruptcy or insolvency?

Under law, a contractor’s bankruptcy or insolvency does not generally constitute grounds for the other party’s unilateral withdrawal from the contract. For the employer, the main consequence of the contractor’s bankruptcy is that:

  • The contractor’s obligations become due and payable (if the contractor has payment liabilities).
  • There will be a change of the contractor’s management at certain stages of bankruptcy (for example, the replacement of the company’s chief executive officer (CEO) with a bankruptcy manager appointed by a court).

However, contractual agreements usually provide for the right of unilateral withdrawal from the contract in the event of the contractor’s bankruptcy or insolvency.


31. Are public private partnerships (PPPs) common in local construction projects? If so, which sectors commonly use PPPs?

In the last few years, Russia has increasingly considered PPPs and the need to develop them further.

A number of major PPP projects involving construction of plants or waste processing, road construction and upgrading of airports have recently been launched. These projects, with a few exceptions, are structured as concession agreements. PPP is also used at the local level in municipalities, mainly in relation to utility services and social welfare facilities.

However, Russian legislation requires amendments to provide for the implementation of PPP models commonly used worldwide (for example, build, own, operate, transfer (BOOT) and build, transfer, operate (BTO) models, and so on). A legislative framework is currently being developed for the application of some of the PPP tools, such as concession agreements, productionsharing contracts and so on.

32. What local laws apply to PPPs?

Major laws governing PPPs are the:

  • Federal law of 21 July 2005 No. 115-FZ “On Concession Agreements”.
  • Federal law of 21 July 2005 No. 94-FZ “On placing orders for goods, works and services for state and municipal
  • Federal Law of 30 December 1995 No. 255-FZ “On Production Sharing Agreements”.
  • Federal law of 25 February 1999 No. 39-FZ “On Capital Investments in the Russian Federation”.
  • Regional legal acts on PPP.

In 2010, to develop PPP in Russia, the PPP Expert Council of the State Duma (lower chamber of the Federal Parliament) developed a model law on PPP. This encouraged the regions to adopt their own regional PPP legislation. In addition, a series of amendments to the federal legislation aimed at further strengthening and developing PPP in Russia is currently under discussion.

33. What is the typical procurement/tender process in a PPP transaction? Does the government or another body publish standard forms of PPP project agreement and related contracts?

The procurement/tender procedure is regulated by statute for a few PPP forms and differs depending on the PPP form:

  • Concession agreements. Conclusion of concession agreements is based on a tender with pre-selection (that is,
    before the bids are analysed, the bidders’ qualification is verified). Standard concession agreement patterns for
    certain facilities (for example, transport facilities) require federal government approval.
  • State orders. Placement of state orders is usually based on bidding (although other processes can also apply). The
    procedure for bidding is regulated by law and each bidding stage, including the time lines, is regulated in detail. The
    bidding process includes:
    • publication of an invitation to bid;
    • submission of bids by the bidders;
    • consideration, evaluation and comparison of the bids;
    • selection of the winner.
  • Production sharing agreements. A special tender procedure, usually an auction, exists in relation to conclusion of
    production sharing agreements. However, this form is now not used in practice.
  • Some Russian regions’ laws also include rules governing tenders for the right to conclude PPP agreements.
  • The tender procedure is currently controversial and disputable in practice. This is because certain different laws establish inconsistent and separate rules for tendering, for example in relation to land procurement.


34. Which are the most common formal dispute resolution methods used? Which courts and arbitration organisations deal with construction disputes?

Formal dispute resolution methods

The majority of disputes are settled in state arbitration courts. If the contract includes commercial arbitration clauses, disputes
between the parties are referred to the appropriate court of arbitration (see below, Courts and arbitration organisations). The
arbitration court’s decision is binding and can generally only be challenged in state court on procedural grounds.

Courts and arbitration organisations

There are no special courts to deal with construction disputes. These disputes are usually resolved by state arbitration courts.

Foreign parties often establish a contractual clause requiring adjudication in an arbitration court of the International Chamber of
Commerce (ICC), the International Commercial Arbitration Court at the Chamber of Commerce and Industry of the Russian Federation (ICAC) or other international arbitration institution.

35. What are the most common alternative dispute resolution (ADR) methods used?

In 2010, the Federal Law “On Alternative Dispute Resolution Process Involving a Mediator (Mediation)” came into force and appropriate changes were made to the Arbitration Procedural Code. In particular, mediators can now be engaged in resolving disputes even if the Court of Arbitration has already begun the trial. The main purpose of the law is to offer a fast and convenient method for resolving disputes, which is flexible and ensures that enforceable decisions can be made during mediation to save costs.


36. What are the main tax issues arising on projects?

Value added tax (VAT)

VAT rates. VAT on transfer (sale) of real estate generally applies at 18%. (No other transfer or turnover taxes apply to the transfer of real estate, although it is subject to profits tax.)

There are special rules on the calculation of VAT arising under investment agreements, construction with the company’s own resources and other specific types of agreement.

Refund of input VAT. Developers face a considerable amount of input VAT during construction, which can be refunded on completion. The amount of output tax at the early stages of an object’s use does not generally allow the input VAT to be used in full. Even though the Russian Tax Code allows developers to recover the difference between input and output VAT in cash, the tax authorities tend to refund large amounts of input VAT only via a court order (that is, litigation is required).

Agreements for the avoidance of double taxation
Many double taxation treaties (DTTs) signed by Russia establish a period within which a construction site cannot be deemed to
be a permanent establishment of the developer. Income tax is not due during this period. However, the conditions for application of tax benefits under the relevant DTT should be carefully reviewed, as the Russian tax authorities’ practice tends to challenge the application of these tax privileges.

Interest deduction
Interest deduction for loans is limited to:

  • For foreign currency loans: 0.8 times the Central Bank rate. Based on the current Central Bank rate of 8%, the interest
    deduction is effectively limited to 6.4% per year.
  • Rouble loans: 1.8 times the Central Bank rate. Based on the current Central Bank rate of 8%, the interest deduction
    is effectively limited to 14.4% per year.

The Central Bank rate is determined at the date of receipt of the borrowed funds (for borrowings establishing a fixed rate for the duration of the loan) or at the date of interest deduction (for other borrowings).

Russia also has thin capitalisation rules. These apply to Russian companies with direct or indirect foreign ownership exceeding
20% of the Russian company’s capital. For these companies, deduction of interest is restricted on loans either:

  • Received from:
    • its direct or indirect foreign parent;
    • Russian affiliated companies of its parent.
  • Guaranteed by such a parent or Russian affiliated company.

In this case, deduction of interest arising under controlled loans is restricted if the loan exceeds three times the borrower’s net assets (or 12.5 times for leasing companies), calculated according to Russian accounting rules. The interest exceeding these limitations is reclassified as dividends for profits tax (withholding tax) purposes.

The current legislation includes a loophole that exempts from thin capitalisation rules any loans extended by foreign sister companies. In addition, Russia has signed agreements with several jurisdictions on avoidance of double taxation, to provide protection against thin capitalisation rules. These agreements allow full deduction of interest to companies owned by residents of the particular DTT jurisdiction.

37. Are any methods commonly used to mitigate tax liability on projects? Are there any tax incentives to carry out regeneration projects?

The following methods are commonly used to mitigate tax liability:

  • Establishment and use of a special purpose foreign legal entity (special purpose vehicle (SPV)) in a jurisdiction with which Russia has signed a DTT. This SPV acts as a parent (holding) company of the Russian developing company. In the case of exit from the project, the shares in the Russian developer or the shares in the SPV itself can be sold, allowing the avoidance of Russian tax on realised capital gains.
  • The use of internal borrowing to increase the additional taxdeductible interest expenses.
  • The construction and use of real estate through a branch of a foreign company having a permanent establishment in
    Russia. This avoids Russian withholding tax on distribution of profits out of Russia and limitations on distributions of
    the originally invested capital.

There are no tax incentives to carry out regeneration projects.

See also, Question 36.


38. Are there any specific requirements that international contractors or construction professionals must comply with?

Since 2010, companies that perform design and construction no longer need to be licensed in Russia. Currently, these companies must become members of an SRO and obtain a Certificate of Admission to perform the relevant works (see Question 20). This applies equally to both Russian and foreign companies.

Real estate construction is generally regulated by national legislation. In particular, this greatly affects the application of the
FIDIC model contracts, which are subject to material adaptation and adjustment.

In addition, the rules for employing foreign and Russian workers must be complied with (see Question 23).


39. Are there any proposals to reform construction and projects law?

The current legislation on construction and projects may be affected by the overall reform of the civil law, which is now under
discussion. This includes significant amendments to the Civil Code, for example in terms of rights to land plots for construction,
authorised construction, and the rights to real estate facilities under construction.

The Town Planning Code is scheduled for revision to define the concept of standard design documentation and include terms for
its repeated use without state examination.

Certain other legislative acts are scheduled for revision to:

  • Cancel the division of land into categories, to avoid more than one institution being responsible for territorial planning and zoning for a particular project. (All land in Russia currently falls within one of seven categories (urban land, agricultural land and so on), while at the same time, territorial planning and zoning is applied. Therefore, urban land may include agricultural land zones.)
  • Improve the definition of the legal status of land plots.

Finally, the laws regulating PPPs are under discussion for amendment, to increase investment attractiveness of PPP projects.

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