B2B: Subsidies For Car Manufacturers

Based on Federal Law No. 89-FZ 'On manufacturing and consumption waste' dated 24 June 1998 and with a view to safeguarding the interests of Russian car manufacturers in conditions where import duty rates for cars were being reduced, the Russian government published its Resolution No. 870 dated 30 August 2012 'On a recycling fee for wheeled vehicles.' This resolution set recycling fees that importers were to pay on top of import duty when importing cars into Russia. In addition, an exemption from paying the recycling fee was granted to, among others, Russian manufacturers who undertook an obligation to ensure that cars were recycled in Russia once their useful life was over. However, when this approach was applied, importers of foreign cars were put at a disadvantage as compared with domestic producers. As a result, the European Union filed a claim to the WTO stating that application of the recycling fees contradicts the WTO requirements. In this regard Russia was compelled to reject a preferential regime for domestic automobile producers with regard to such recycling fees.

Despite this, the current legislation makes it possible for domestic automobile producers to obtain reimbursement of the recycling fees.

In particular, the recycling fees may be compensated by way of subsidies from the Russian federal budget based on the Resolutions of the Russian Government No. 29 — 32. Such subsidies are granted in the form of compensation for the expenses of domestic producers related to:

• research and development works, testing wheeled vehicles, paying for the labor of the manufacturer's employees, material expenses directly relating to performing the work in question, and the cost of the relevant services of third party organizations;
• payments for electric power used for production purposes;
• payroll costs;
• expenses on social and medical insurance and contributions to the Russian Pension Fund; and
• expenses on manufacturing vehicles and supporting guarantee obligations in respect of vehicles manufactured after Jan. 1, 2014.

The majority of the subsidies may be granted to a manufacturer not only in relation to its own costs but in relation to the costs of parties affiliated with the manufacturer or by other parties, provided that they provide the manufacturer with services that involve specific technological operations being carried out when vehicles are manufactured.

The following main conditions to be met to obtain the subsidies are as follows:

• conclusion of an agreement with the Russian Ministry of Industry and Trade;
• the manufacturer is a legal entity registered within the Russia;
• the manufacturer has no arrears in relation to tax, levies and other mandatory payments due to Russian state authorities;
• it manufactures vehicles under the industrial assembly regime or a free customs zone customs procedure;
• the manufacturer has been allocated a world manufacturer identifier (WMI), and the manufacturer is authorized to place the vehicle identification numbers (VIN);
• the maximum amount of the subsidy should not exceed 90 percent of the maximum expenses set for each type of subsidy;
• a quarterly report is submitted to confirm that the manufacturer incurs the above costs;
• the amount of the subsidy is transferred to the manufacturer's current account in a Russian bank; and
• the expenses have been incurred after Jan. 1, 2014.

Moreover, current legislation also establishes a range of additional conditions and whether these are met may influence whether specific types of subsidies are applied, for example, no debts related to electric power payments; a minimum of 100 employees engaged in research and development work; there being a base at a science and technology center located in Russia where research and development is undertaken; etc.

The Industry and Trade Ministry grants subsidies on a quarterly basis. To receive a subsidy, a car manufacturer must file an application in voluntary form for a subsidy to be granted, which should be accompanied by supporting documents.

The application must be filed to the Ministry no later than the 12th of the month following the quarter for which the manufacturer is asking for the subsidies. 

Current legislation provides for only two grounds for refusing to grant a subsidy, which are:

• the documents submitted to the Industry and Trade Ministry do not meet the conditions for the subsidy to be granted;
• the Federal Budget of the Russian Federation lacks the funds envisaged for the purposes of the subsidies that are being granted.

It is worth noting that, because the procedures for granting subsidies have not been sufficiently worked through, in some cases the amounts of the subsidies in question can exceed the amounts of the recycling fees manufacturers have paid.

In addition, it is a drawback of the procedure that there is such a complicated reporting mechanism for granting subsidies. This is due to the large number of subsidies, all of them having different criteria, different procedures for confirming the calculation of the subsidies and different sets of supporting documents. As a result, the document flow is considerable. Consequently, if they are to receive subsidies, manufacturers may need to structure themselves so that they have standalone divisions whose main activity is to prepare supporting documents with a view to obtaining subsidies. The above complicated procedure makes it difficult for the Industry and Trade Ministry to administer and control the granting of subsidies.

Bearing this in mind, it is advisable for manufacturers to analyze with great care the potential implications, paying attention to the pros and cons of receiving subsidies, before they enter into the relevant agreement with the Industry and Trade Ministry.

Subsidies to reimburse the cost of interest on loans

No less attention should be given to subsidies granted to car manufacturers based on the Russian Government's Resolution No. 640 dated Aug. 1, 2011. However, this subsidy may not be applied to reduce interest under loans obtained in 2014. Moreover, such a subsidy may not be granted after 2015. Therefore, there are limited opportunities to apply this subsidy in 2014.

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