Focus on South Korea (Issue 4, 2017)
Preferential tax period to be extended for major investment projects in the Far East
In July 2017, the Government of Russia approved a draft law extending the period for corporate profit tax incentives for major investment projects implemented by residents of the advanced special economic zones and the Free Port of Vladivostok. The draft law is now under consideration by the State Duma of the Russian Federation. It was drafted in response to President Putin’s direction that it should be enacted by the end of 2017.
Presently, the zero-rate corporate profit tax for the residents of the advanced special economic zones and the Free Port of Vladivostok is applied for only five years. In reality, the five-year limitation has produced few benefits or incentives for investors; because, in capital-intensive investments, the tax benefit usually expires just when the investor is first beginning to realize a profit.
If the draft law is enacted, changes to the Tax Code of the Russian Federation will allow a deferral of the beginning of the zero rate, depending on the scope of the cash investments that have been made. For example, a resident implementing a project with an investment scope exceeding 500 million rubles may switch to the preferential taxation after five years of zero-profit operations, after six years for investments over 1 billion rubles, and after nine years for investments over 100 billion rubles.
This legislative initiative will be discussed at the 2017 Eastern Economic Forum by members of the State Duma and the Council of Federation of the Federal Assembly.
Tax incentives for the tourism in the Far East signed into law
On July 19, 2017, President Putin signed Federal Law No. 168-FZ, Making changes in paragraph 25 part two of the Tax Code of the Russian Federation regarding creation of a favorable environment for development of the tourist recreational activities in the Far Eastern Federal District, dated July 18, 2017.
This law amends Tax Code of the Russian Federation to provide incentives to develop tourist recreational activities in the Far East. Specifically, the act sets a zero rate for the corporate profit tax for organizations that run a tourist business in the Far Eastern Federal District. The list of activities covered by the act will be approved by a decree of the Government of Russia.
The new tax preferences apply when all of the following conditions are met:
• The organization’s income from tourist recreational activities constitutes at least 90 percent of all of its income, as calculated for purposes of determining the taxation base for the corporate profit tax;
• The organization does not apply reduced rates to its corporate profit tax;
• The organization has no operations involving securities or financial derivatives;
• The organization has no autonomous subdivisions in regions of the Russian Federation that are not a part of the Far Eastern Federal District; and
• The organization owns a hotel or another place of accommodation registered in the state cadaster in the Far Eastern Federal District.
The incentive for the corporate profit tax payment is terminable and is available from January 1, 2017, to December 31, 2022.
The new tax incentives are part of the Government’s direct support of investments in tourist recreational activities in the Far East. The preferential taxation also will allow reduced prices for tourist services, which will promote the growth of tourism in the region.
Kamchatka Territory expands cooperation with South Kore
On July 28, 2017, the Government of Kamchatka Territory and the Korean Association of Fishery Cooperatives (Suhyol) met to discuss mutually profitable cooperation in developing the fishing industry, both in Kamchatka Territory and in the Republic of Korea. Negotiations resulted in the signing of a memorandum of mutual understanding.
The program “Development of the Fisheries Complex of Kamchatka” currently is underway in the Territory. It intends to lead to the construction of at least 25 fish-breeding farms and, if the investors are interested, over 100 more such farms. Representatives of the Territory also intend to use high-quality Korean equipment at the fish-processing facilities.
As part of the “Day of the Korean Investor,” a score of major companies, such as Korea Trading and Industries, Korean Seafoods, Unico Logistics, and the Port of Busan, presented a joint project to create a fishing-industry complex in Primorye Territory. This complex will include a fishing port, a logistics center, and plants to produce crabmeat, fish fillet, and fish meal. The complex would supply manufactured products to the countries of the Asia-Pacific Region and to Europe.
Regional authorities state openly that they give preference to Korean investors, and the development aqua-culture projects is merely one of the possible lines of partnership.
For instance, the Governor of Kamchatka Territory and the Special Envoy of the President of the Republic of Korea in the Russian Federation, Song Young-Gil, met on July 29, 2017, to discuss the construction of the Kamchatka regional hospital. Russian representatives reminded their Korean colleagues that, within the scope of the 2nd Eastern Economic Forum, a cooperation agreement with the Korea Health Industry Development Institute aims to engage private Korean investors in hospital construction and the use of state-of-the-art Korean technologies in the new medical institution. The project documentation is already adapted to the standards of the Republic of Korea; and the Government of Kamchatka Territory is expecting its Korean partners to support the execution of such an important project.
Investments of South Korea into the Far East quadrupled
On August 18, 2017, the Minister for the Development of the Russian Far East, Alexander Galushka, met with the Minister for Commercial Negotiations of the Korean Ministry of Trade, Industry and Energy, Kim Hyeon-Jeong, to discuss expanded cooperation in the Far East.
In the opinion of Alexander Galushka, the most rational solution for international cooperation in development would be to form of a joint Russian-Korean company that would be an official conductor of Korean business in the Far East. The Far East Investment and Export Agency was suggested as a co-founder on the Russian part. Previously, the Japan Bank for International Cooperation (JBIC) and the Far East Investment and Export Agency formed a similar company to advance Russian-Japanese cooperation.
During the meeting, Alexander Galushka pointed out that in the past three months, the scope of South Korean investments in the projects in the Far East had increased from USD 67 million to USD 272 million. He described the Republic of Korea one of Russia’s key partners in the Asia-Pacific Region.
Kim Hyeon-Jeong announced his government’s intention to build a system of interaction with Russia that would be conducive to the implementation of joint investment projects.
The recent launch of a cooperative information system for investment projects is producing major advantages. Currently, the system includes 425 projects, specifically projects of all the residents of the advanced special economic zones and the Free Port of Vladivostok, and 14 other projects that receive infrastructural support. Each investor has a personal account; and employees of all interested agencies can obtain on-line information about the projects’ road maps. The system is intended to solve the investors’ current problems promptly by giving them real-time tracking of the execution of investment projects.
Sakhalin Region is interested in the cooperation with Korean investors
On August 1, 2017, the Governor of the Sakhalin Region, Oleg Kozhemyaka, and the Special Envoy of the President of the Republic of Korea, Song Young-Gil, who also headed the delegation of the Northern Economic Expedition, agreed to enhance economic and humanitarian inter-regional relations. Russian representatives invited their Korean colleagues to participate in the execution of the major projects in the region, in tourism, agriculture, and transport infrastructure. Under the agreement, the parties will coordinate supplies of Korean equipment by Daewoo, Samsung, and LG to the Sakhalin Region, which will be used in various economic sectors.
In addition to this, a coal conveyor – a unique structure about 30 km long – is planned to be built in the Region. The conveyor is needed to the transfer the mined coal from Solntsevskoe deposit directly to the port of Shakhtyorsk, from which it will be exported in bulk to South Korea, Japan, China, the Philippines, Taiwan, and India. Annual coal extraction levels in Sakhalin have quadrupled in the past four years to four million tons.
The coal company is currently expecting offers from various suppliers of conveyor equipment needed for the project. As of today, offers had been received from Russian and Japanese companies.
Korea Telecom Corporation encourages advanced telemedicine in the Far East
On August 18, 2017, representatives of Far East Investment and Export Agency (IEA), the Governor of Primorye Territory, Pavel Serebryakov, and the director of development of global operations in healthcare of the Republic of Korea, Kim Min-Song, discussed the execution of an investment project of Korea Telecom Corporation, which is the major provider of integrated wireless telecommunication services in South Korea.
This project would distribute portable equipment developed by Korea Telecom Corporation throughout the whole of the Russian Far East and to develop advanced communications capabilities in healthcare, including improved electronic medical records systems.
The parties agreed to continue discussing the project and to sign a trilateral agreement of cooperation between IEA, Korea Telecom Corporation, and the Busan National University Hospital, within the scope of the Eastern Economic Forum.
Korean investors willing to invest into the cluster formation in the Far East
The Far East Development Corporation and a delegation from Busan, headed by its Mayor, So Byeong-Su, met in Vladivostok in July. The Mayor of Busan expressed an interest in the development of Russian-Korean cooperation and his city’s willingness to support investment projects in the Far East. The Korean representatives noted also that 80% of the shipbuilding capacities of the Republic of Korea are in Busan. Busan is also placing special emphasis on the improved environmental standards in activities in its maritime sector. Busan-based companies are interested in investing in projects in the Russian Far East, operating as a cooperative cluster of companies that constitute a single production chain. In addition, the Korean representatives expressed their intention to combine their efforts with the Russian Far East in such spheres as shipbuilding, international supplies, and tourism.
Later, OOO Terminal Seroglazka, which is a resident of the Free Port of Vladivostok, declared its intention to launch an international container line that would start in Petropavlovsk-Kamchatsky. The first deliveries will go via the Busan – Petropavlovsk-Kamchatsky – Busan route. Following its execution of the investment projects, the company plans to create a large modern refrigerator terminal in Petropavlovsk-Kamchatsky, which would enable Kamchatka-based manufacturers of fish products to obtain a direct access to the global markets. The project’s execution and the development of the sea shipping system will end the necessity to reload products in other ports. This will allow a reduction in both the supply costs and the ultimate prices, while retaining high product quality while during transport.
South Korean company Hyundai Merchant Marine intends to develop the Northern Sea Route
South Korea’s largest container carrier, Hyundai Merchant Marine, announced its intention to start an active use of the Northern Sea Route in 2020. Development of this route will enable the company to reduce the time required to ship cargo from South Korea to Europe, consequently leading to the reduction of operational costs. Hyundai Merchant Marine is going to launch container vessels with 2.5-3.5 thousand TEU capacity for use on the Northern Sea Route. The company points out that, to attain this target, it will need the help of Russia, which owns the majority of ice-breakers in the world. Hyundai Merchant Marine is willing to hold negotiations with the Russian partners at the earliest date and to discuss the test pilotage of the vessels via the Northern Sea Route.
The basis for Hyundai Merchant Marine’s plans were agreements between the President of the Republic of Korea and the President of Russia during the G20 summit in Hamburg on July 7-8, 2017. The Government of South Korea is expected to speed up its participation in the development of the Arctic route with Russia’s assistance.