ToBelarusian News - November 2011
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  Maksim Salahub
   
  Maksim Salahub
Partner
maksim.salahub@sorainen.com
   
  Iryna Mitsianiova
   
  Iryna Mitsianiova
Associate
iryna.mitsianiova@sorainen.com
   
  Alesia Tsiabus
   
  Alesia Tsiabus
Associate
alesia.asiabus@sorainen.com
   
  Maksim Salahub
   
  Tamara Sakolchyk
Associate
tamara.sakolchyk@sorainen.com
Dear clients and cooperation partners,

I would like to bring to your attention several quotations by a Belarusian politician dedicated to economic strategy for the year 2012.  “We should live within our means.  If we want to live well, we should work more. This is an axiom”. “First of all we will use economic methods...  No one will get easy emission money”.  “There will be reforms.  By the way, in the nearest future.  We are thinking them over”...  I could go on with this but most of you must have guessed that the phrases belong to President Alexander Lukashenka.  Indeed, he said them on 23 December 2011 during a 4-hour press-conference for the Belarusian and Russian media. Could this mean upcoming major changes in the Belarus business climate?  Economic strategy for 2012 had been more heavily debated than in previous years, and we could even observe a rather tense struggle between market-oriented members of the Government and conservative economic advisors in the Administration of the President.  That was not surprising after a year in which Belarus had become a hyperinflation economy (108.7% annual rate, refinancing rate of the National Bank up from 12% to 45% during the year), average salary decreased from the equivalent of USD 510 in December 2010 to USD 245 in December 2011, and overall the country had gone through a relatively short but severe economic crisis.
So what will 2012 bring?  Official forecast figures are as follows:

  • average    exchange    rate    for   the   US     dollar   will    be USD 1/BYR 9,150 (currently in the area BYR 8,300–8,500);
  • inflation rate 19–22%;
  • GDP growth 5.5%;
  • real disposable incomes of the population to grow by 3–3.5%. We can add another quotation of the same politician here, “average salary will be brought back to the pre-crisis level within 1–1.5 years”;
  • USD 1.5 billion positive trade balance;
  • incoming foreign direct investment USD 3.7 billion which includes USD 2.5 billion from privatisation.

These sound like very challenging goals. What is the Belarusian Government undertaking to achieve them? Significant changes have occurred in various areas of the business environment, starting with taxation.


Major tax changes in 2012
Privatisation Plan 2012
Measures taken with regard to 54 select enterprises to prevent dilution of shares among minorities after privatisation
Procedure for formal communication with state authorities improved
New regulations on Duty Free shops approved
Vireo Energy invests in renewable energy in Belarus


 

Major tax changes in 2012

On 1 January 2012 a number of amendments to the Belarusian Tax Code came into force. Most are aimed at general simplification of the Belarusian tax system and reduction of the tax burden on businesses.
The main changes are as follows.

Corporate income tax (CIT)

  • The general CIT rate was reduced from 24% to 18%.
  • Taxpayers may now carry forward losses incurred in 2011 and subsequent tax periods for a period of 10 years.

Carry-forward of losses is not possible with regard to:

(a) losses incurred as a result of activities outside Belarus if a company is registered as a taxpayer in a foreign state with regard to such activities;
(b) losses incurred as a result of the tax period (periods; part of the tax period) when a Belarus company could apply CIT relief established for several tax periods.

  • Taxpayers may record part of the initial value of fixed assets and intangible assets as costs for CIT purposes as of the date when those assets were initially accounted for.

The following limitations apply:

(a) with regard to buildings and constructions – up to 10% of the initial value;
(b) with regard to machines, equipment, vehicles, and intangible assets – up to 20% of the initial value.

Transfer pricing rules

Tax authorities in the course of a tax audit (except for in-office audits) may check that prices agreed by the parties in transactions correspond with market prices and adjust the tax base for CIT. This check is possible with regard to the following transactions:

(a) Sale of real estate when the transaction price is lower than the market price by 20% or more;
(b) Export-import transaction(s) when the price of the transaction (the price of transactions with the same party) in a calendar year is higher than BYR 20 billion and lower than the market price by 20% or more.
The tax authorities determine the CIT base on the basis of the market price for identical goods. In the absence of information on the price for identical goods, the tax authorities may apply the following methods:
(a) comparable uncontrolled price method;
(b) resale price method; and
(c) cost plus method.

The comparable uncontrolled price method should be applied first. If the market price cannot be determined on that basis, the resale price method should be used. If both previous methods cannot be applied, the tax authorities must use the cost plus method.

Real estate tax

The list of objects subject to real estate tax is supplemented with car parking spaces.

Land tax

The list of objects exempted from land tax was extended. It includes, inter alia:

(a) Land plots provided for construction of motorway service objects – within the period of their design and construction and within 2 years after putting them into operation;
(b) Land plots within the borders of FEZs provided to FEZ residents (registered from 1 January 2012) for the purposes of construction of objects – within the period of design and construction of the objects but not more than within 5 years of the registration date.

Clarifications from the Ministry of Taxes and Duties

As previously, taxpayers may apply to the tax authorities for written clarifications of tax provisions. Though tax rulings by the tax authorities are still not binding on tax authorities, currently taxpayers are exempted from late payment penalties and administrative liability if tax violations resulted from enforcement of written clarifications from the Ministry of Taxes and Duties.

Thin capitalization rules – to be effective as of 1 January 2013.

The amount of loan interest that can be deducted for CIT purposes will be limited if:

(a) the foreign company which provided the loan directly or indirectly holds over 20% of shares in the authorized capital of the Belarus taxpayer; and
(b) as of the last date of the tax period the amount of loan debts to the foreign company exceeds the assets of the Belarus taxpayer by more than 3 times.

The amount of interest which can be deducted for CIT purposes will be calculated by dividing the amount of interest by the coefficient. The coefficient will be calculated according to the following formula:

Coefficient = Loan debts on the last date of the tax period (excluding interest) / own capital which corresponds to the share of the foreign company in the authorized capital of the Belarus taxpayer / 3.

Iryna Mitsianiova
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Privatisation Plan 2012

The State Property Committee of Belarus has summarised the outcomes of the 2011 privatisation campaign. Shares of 34 reorganized state enterprises were successfully sold to Belarusian and Russian investors.  The number of enterprises sold is 7 times more than in 2010, though it amounts to only 19% of the 2011 plan.  Total revenues from privatisation are over BYR 140 billion (we would not undertake the task of transforming this amount into EUR or USD as the sales happened at various moments of the year whereas multiple exchange rates of BYR existed).  Apart from these sales stands the sale of the remaining 50% stake in Beltransgaz (national gas pipeline) to Russia’s Gazprom for USD 2.5 billion.

Privatisation progress was criticized by the national Government. In 2012, it wishes to gain not less than USD 2.5 billion from privatisation.  However, right now this mission seems to be close to impossible as only 133 companies of pretty much the same quality will be offered to investors (actually 83 of th ese are companies from the 2011 list).  The 2012 privatisation plan has been submitted to the President for confirmation.  Auctions and contests will most likely resume not earlier than June 2012 as valuations and investment proposals are prepared based on 2011 accounting data.

One of the novelties in the privatisation campaign for this year will be that several enterprises will go for sale with the support of financial advisors.  Currently, the Belarus National Agency for Investment and Privatisation under the Ministry of Economy (NAIP) is reviewing pitches from 31 bidders in special tenders, the results of which will be known by late April – early May. The winner (or winners) will advise the government in the course of privatisation of the 8 targets from the food and construction materials industries.

Additionally, the State Property Committee is considering improving approaches to valuation of privatisation targets. This should make conditions of auctions and contests more attractive to investors.

It is also reasonable to expect that Belarus National Bank will keep seeking investors for several banks. In particular, investors may be offered controlling stakes in Paritetbank, Belinvestbank (so far 100% government property), a 28.6% share in VTB Belarus . The government also says it may sell minority stakes in the country’s largest and 100% state-owned Belarusbank and Belagroprombank to strategic, possibly European, partners.

We will follow privatisation developments and present all news, tips, and other useful information on the SORAINEN Belarus Privatisation Helpline.

Maksim Salahub
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Measures taken with regard to 54 select enterprises to prevent dilution of shares among minorities after privatisation

Presidential Edict No. 7 on certain issues of reorganisation of Republican unitary enterprises into open joint companies dated 5 January 2012 abolished discounted sale of shares to employees at select 54 key state enterprises after their reorganization into open joint stock companies.

Before adoption of Edict No. 7 all open joint stock companies created on the basis of state unitary enterprises could sell own shares to their employees at a reduced price – 20% below nominal value. Each employee could obtain shares of a value not exceeding 100 basic units (currently about EUR 330). Presidential Decree No. 3 on privatisation of state property dated 20 March 1998 foresaw that the right to discounted sale of such shares would terminate on 31 December 2013.

Edict No. 7 sets a list of 54 state enterprises to be reorganised in 2011 – 2013 into open joint stock companies whose shares will not be sold at a reduced price. 100% shares of open joint companies upon completion of reorganisation will remain in state ownership and will be sold to investors at auctions (contests) in compliance with 2011 – 2013 privatisation plans .

This list includes enterprises in key sectors of the Belarusian economy, such as:

  • production of construction materials (Belarusian Cement Plant, Granit Production Enterprise);
  • processing of ferrous and non-ferrous metals (Beltsvetmet, Minskvtormet, several plants located in cities other than Minsk);
  • petrochemical industry (Svetlogorsk Production Association Khimvolokno);
  • pharmacy and microbiology (Bobrujsk Hydrolysis Plant, Industrial Complex for Manufacturing of Medical and Alcohol-Containing Production Etanol);
  • machinery (Gomselmash, Minsk Tractor Works);
  • transport and communications ( National airlines Belavia , Minsk Plant for Aircraft Repairs);
  • foreign trade (Belimporttorg);
  • alcohol production (Minsk Kristall, Belalko, Nemanoff);
  • textile industry (Baranovichi Cotton Production Amalgamation);
  • food industry (several large bakeries).

According to the official commentary to Edict No. 7, these measures are aimed at preventing dilution of shares among minority shareholders and attracting major investments to these companies in the course of privatisation.

Alesia Tsiabus
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Procedure for formal communication with state authorities improved

In January 2012, a new edition of the law on procedure for addresses to authorities by citizens and legal persons entered into force. The law establishes the procedure to be followed when filing inquiries and requests with government authorities and other organizations.

The major novelty envisaged by the new law is electronic requests. Interestingly, only state authorities and organizations are obligated to consider electronic requests. Other organizations may do so at the discretion of their chief executives.

The law provides two ways of addressing authorities electronically: (i) via e-mail, and (ii) by posting a request on a specially designated official web-page of the authority. This means that requests posted in other ways, i. e. via blogs, Internet fora, will not be considered.

Electronic requests should contain the same elements as written ones except for the applicant’s signature. In addition, the applicant’s e-mail address is a mandatory element of electronic requests.

State authorities have 15 days to respond to an electronic/written request on the merits, or 30 days if additional study/examination is needed. Responses should be substantiated, if necessary, by references to the law. In the case of electronic requests a response should be forwarded via e-mail, unless:

  • the applicant requests a written response;
  • the applicant’s e-mail is missing, or
  • the head of a state body decides to prepare a written response.

Another novelty concerns individual verbal consultations. The law allows for video and audio recording of personal requests, as well as taking pictures during consideration of the request. The requestor, though, should be informed of this and may refuse to make a verbal request.

The law aims at balancing responsibility between representatives of state authorities and applicants. For undue consideration of requests, state officials may be fined or even fired. Applicants are warned against filing repeated groundless requests; if they do, they may be obligated to cover costs related to examination of their requests.

Tamara Sakolchyk
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New Regulations on Duty Free shops approved

On 17 January 2012 the President of Belarus signed Edict No. 38 which provides for new rules of operation for duty free shops.

Edict No. 38, as opposed to previous regulations, does not require a mandatory state share in the authorized capital of organizations that  own duty free shops.

However, as before, it determines a list of companies which are allowed to open duty free shops. Currently, this list includes 4 companies. According to Edict No. 38, companies which are not included in the list may become entitled to operate duty free shops by special decision of the President. Current Belarus laws do not provide a specific procedure for the President to determine those companies. As we have managed to find out, in practice companies that wish to be involved in the duty free shops business apply directly to the President with a request in free form to be included in the relevant list.

One of the main novelties in Edict N. 38 is that companies that own duty free shops must make quarterly payments to the Belarus budget in the amount of 10% of revenues from duty free sales.

Iryna Mitsianiova
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Vireo Energy invests in renewable energy in Belarus

SORAINEN is assisting Vireo Energy (Sweden) on its energy projects in Belarus, involving construction of landfill gas installations at Belarusian landfills and green energy production.

So far SORAINEN has advised the client on investment agreements with the Republic of Belarus for implementation of projects in the Vitebsk, Orsha and Polotsk regions and assisted with arranging the corporate and contractual framework of local operations as well as in regulatory matters and negotiating particular contracts.

Vireo Energy invests in renewable energy production, with a particular focus on bioenergy opportunities where it can convert "waste streams" such as landfill gas, municipal waste and organic industrial and agricultural residues into cost-effective heat and electricity. Vireo Energy is a part of the Kinnevik Group, a major Swedish investment company with a 75 year history of building successful new businesses.

Implementation of Belarusian projects will reduce emissions of carbon dioxide into the atmosphere as well as dependence on imported fuels and will increase regional and national self-sufficiency.

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