Perhaps Russia is not the first country that comes to mind when one thinks about the green economy. At the same time, Russia is paying attention to the changes that are taking place in the public mind and in the global climate and energy agenda.
To develop a green economy, Russia provides tax incentives, which will be discussed in this article. The article considers three categories of tax incentives:
- Income tax reduction for increased depreciation of fixed assets;
- Tax loan; and
- Exemption from tax on the property of legal entities.
Income tax reduction for increased depreciation of fixed assets
In order to stimulate the implementation of facilities with high energy efficiency, the Tax Code of the Russian Federation (“Tax Code”) provides for an increased depreciation rate for certain facilities. The taxpayer is entitled to apply a special coefficient to the basic depreciation rate, but not higher than 2, for such objects as solar panels, wind generators, electric motors with high (> 92%) efficiency, oil pumps with an efficiency of at least 55%, and many others. The full list of eligible facilities was approved by the Russian Government on 17 June 2015 and can be accessed in Russian here (“List”).
How it works
In order for a company to be able to attribute the depreciation costs of an object and thereby reduce taxable income, three conditions must be satisfied simultaneously:
- Initial cost of the facility exceeds 100,000 RUB;
- Useful life of the facility exceeds 12 months; and
- The facility is used to generate income.
Let's say the useful life of a wind generator is 25 years, and its initial cost is RUB 1,000,000. Then to purchase a new generator after the expiration of the useful life of the old one, each year 4% of the initial cost (1/25 = 4%) may be attributed to expenses. Due to the increasing coefficient, each year 8% of the initial cost may be attributed to expenses, which comes to a total of RUB 80,000 per year. Thus the tax base may be reduced for a total of 12 years (80,000*12 = RUB 960,000).
Under the tax loan incentive, the taxpayer reduces payments to the budget for a certain period of time, and is then obligated to gradually pay the accumulated tax debts and interest on them. But the interest on the loan is significantly lower than market lending rates; hence the benefit. Such a tax credit is granted for a period of 1 to 5 years.
For each tax period, the taxpayer is entitled to reduce the amount of tax by no more than 50% of the amount that he would have paid under the usual set of circumstances. The decrease is made until the amount of the debt reaches the loan amount.
For example, suppose the company invested RUB 100 in the construction of a wind generator in Russia. It is entitled to postpone payment of income tax for this amount of RUB 100. Let’s say the loan term is 5 years, and the income tax for the first year of operation from the beginning of the investment amounted to RUB 50. Then the company is entitled to pay only 50% of the income tax, which is at least RUB 25 (so as not to violate the rule of reducing tax amounts by no more than 50%). If over the next 3 years the income tax stays the same at RUB 50, then each year the company can pay RUB 25, and the remaining RUB 25 will accumulate to the company's debt. Then for all four years the company will accumulate a debt in the amount of RUB 100 (RUB 25*4 = RUB 100) and begin to pay it with interest only after the tax loan expires (after 5 years).
Exemption from tax on the property of legal entities
Legal entities are exempted from taxes for 3 years if they include newly commissioned facilities with high energy efficiency as part of their property. Currently, these include apartment buildings that have an energy passport as well as certain objects from the above-mentioned List. This List includes solar panels and wind generators. Moreover, the List of facilities is quite extensive and even includes oil gas treatment plants and hydraulic turbines. Therefore, this section will in theory be useful to any production company.
To take advantage of the incentive, one needs to complete the following steps:
- Make sure that the object for which the exemption is intended is an apartment building or is included in the List;
- Ensure that the region where the facility is located has a law confirming the right to claim the incentive;
- Obtain an energy passport for the facility before putting it into operation; and
- Put the facility on accounting.
Even if the facility has high energy efficiency, is properly commissioned and operating, the incentive can be applied only for the period following the date of receipt of the energy passport.
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The state sees a growing interest of business and citizens in the green economy and is trying to introduce tax incentives for its development. Although these incentives are not perfect, the first important steps have been taken, paving the way for continuous improvement of tax legislation to facilitate the building of an energy-efficient economy in Russia.