01 Января 2010

Legislative Benefits for Small-and Medium-sized Enterprises

The primary statute regulating activity of the subjects of small-sized and medium-sized enterprises (SMEs) is the federal law “On the Development of Small-sized and Medium-sized Enterprises in the Russian Federation,” dated June 24, 2007, No. 209-FZ (Statute). The Statute introduces several criteria which can be used to identify enterprises as small- or mid-sized:

1. SMEs can only be commercial organizations or entrepreneurs.

2. The overall amount of participation in the enterprise’s charter capital of Russian state, regional and municipal governments, foreign legal entities, foreign citizens, public and religious organizations (unions), charitable and other funds of legal entities cannot exceed 25 percent (except for assets of joint-stock investment funds and closed share investments funds); participation in the charter capital of one or several legal entities that are not SMEs themselves can not exceed 25 percent as well.

3. The Statute regulates the requirements for the average amount of employees for SMEs:
• From one hundred to 250 inclusive employees for mid-sized enterprises
• Up to one hundred employees for small enterprises
• Up to fifteen for micro enterprises

4. According to the Statute, the Government is empowered to set the maximum amounts of profit received from the sale of goods (works or services) or the balance cost of assets for each category of enterprises.

The Decree of the Government of the Russian Federation, dated July 22, 2008, No. 556, sets forth the following thresholds of income from the sale of goods:
• For mid-sized enterprises: 1000 million rubles
• For small-sized enterprises: 400 million rubles
• For micro enterprises: 60 million rubles

The category of the SME is subject to change if the maximum threshold of the SME is higher or lower than the stated maximum during two calendar years in a row.

The Statute provides that the newly created organizations or newly registered entrepreneurs are entitled during the year in which they were registered to be recognized as SMEs, provided that the average threshold of the number of employees, amount of profit received from sale of goods, or the balance cost of the assets for the period left from the state registration will not increase.

The main measures of state support of SMEs are provided in the Statute as well. They include, among others:

1. Special tax regimes, simplified rules for tax accounting, and simplified forms of tax declarations on certain taxes for small-sized enterprises;
2. A simplified accounting system for SMEs that conduct certain types of business;
3. A simplified procedure on compilation of statistical accounts by the SME;
4. A preferential procedure of calculations for the privatization of state and municipal property by SMEs;
5. Peculiarities in procedure of participation of SMEs as suppliers (performers, contractors) in the placement of orders for the supplement of goods, performing of works, or rendering services for state and municipal needs;
6. Measures for ensuring the rights and legal interests of SMEs during the execution of the state control (supervision);
7. Measures on ensuring the financial support of SMEs;
8. Measures on the development of the support infrastructure for SMEs and
9. Other measures that are aimed at ensuring the implementation of goals and principles set forth in the Statute.

Tax Regimes

SMEs are entitled to convert from the ordinary tax regime into Simplified Tax Regime (STR). STR is a combination of profit tax, property tax, and a unified social tax into one single unified tax calculated on the results of the business activity of the organization – either 6 percent from overall income or 15 percent from net profits, as the taxpayer chooses. Organizations that pay STR are not obliged to pay the Value Added Tax (VAT) except for the cases where VAT must be paid when importing goods into Russia.

The Tax Code of the Russian Federation provides a list of organizations that cannot pay according to STR. It includes, among others:

• Organizations that have branch offices or representative offices;
• Banks;
• Insurers;
• Non-government pension funds;
• Investment funds;
• Professional participants on the stock market;
• Organizations operating in the spheres of extraction of mineral resources and
• Foreign organizations.

The maximum amount of overall profit for STR eligibility is set at 20 million rubles. However, recent court practice suggests that amount shall be indexed according to inflation and currently equals approximately 60 million rubles. Also, the government has initiated a draft law to increase this threshold. Importantly, a conversion back to STR can be implemented no earlier than one year after the taxpayer has last exceeded this limit.

Another special taxation regime available to companies engaged in a limited list of customer-related activities (dry cleaning, repair services, technical services, car washes, small retail shops, and restaurants) is the Uniform Tax on Inputted Income.

Simplified accounting rules

According to Article 4 of the Federal law “On Accounting,” SMEs that use STR are not obliged to implement general accounting rules except for rules on accounting of the main assets and non-material assets. However, our practice shows that businesses do not generally use this exception because standard accounting may be required for reviews in banks and other partnering organizations, as well as if the company switches back to a normal tax system.

The measures mentioned above are well known to Russian entrepreneurs: they help lower the amount of paperwork, cut tax accounting expenses, and, in some cases, decrease the tax burden. However, there are some other benefits available to SMEs.

Preferential procedure of privatization

The current legislation provides a preferential procedure for settlement for the privatization of state and municipal property by SMEs. Clause 5 of Article 3 of the Federal law “On Privatization of State and Municipal Property” sets out that the peculiarities on participation of SMEs in privatization of the leased state and municipal real property may be regulated by the statute.

At the present time, the Federal law “On Peculiarities in Disposal of the Real Property Owned by the Regions of the Russian Federation or Municipal Governments and Leased by SMEs and on Amending Particular Legal Acts of the Russian Federation” dated July 22, 2008, No. 159-FZ, provides that the lessee has the preemptive right to acquire the leased property owned by the regions of Russia or municipal governments if certain conditions are implemented.

Article 5 of the previously mentioned statute is named “The Procedure of Payment for the State and Municipal Property, Acquired by the Lessees Upon Exercising the Preemptive Right on its Acquisition.” It stipulates the installment of payment for the property, providing that the right to choose the order of payment (in a lump sum or by installment) belongs to the SE upon exercising the preemptive right to acquire the leased property.

The Russian Government, in Decree No. 961, dated December 18, 2008, introduces the maximum area of the premises owned by the regions of Russia or municipal governments that are leased by SMEs for the purpose of exercising their pre-emptive right in order to acquire such property. The limit is 1,000 square meters; and the longest term of installment is three years. The decree took effect on January 1, 2009.

State and municipal orders

Federal law No. 94-FZ, ”On Settling of Orders on Supply of the Goods, Performance of Works, Rendering Services for State and Municipal Needs,” dated July 21, 2005, contains the provisions related to particularities of the participation of SMEs as suppliers (contractors).

Part 1 provides that: “State customers, excluding the cases of making the orders on the supplying of goods, performance of work, rendering services for the purpose of the country’s defense and security of the state, and the municipal customers shall make orders to SMEs in an amount no less than 10 percent and no more than 20 percent of the total annual value of supply of the goods, performance of work, or rendering of services in compliance with the list of goods, work, or services stipulated by the Government of the Russian Federation, by means of holding tenders, inquiring about quotations, participants being SME, and the state customers in cases of making orders on the supplying of goods, performance of work, or rendering of services for the purpose of the country’s defense and security of the state, are entitled to make such orders.”

The requirements with respect to the highest price of the contract are also stipulated in the aforementioned statute. It is set out that “upon making an order by holding tenders, inquiring about quotations that are provided in Clause 1 hereof in which the participants are SMEs, the applications for participation in the contest, auction or quotation applications submitted by the participants that are not SMEs shall be declined.”

The list of the goods, works, and services for state and municipal purposes that are ordered from an SME is approved by the Decree of the Government of the Russian Federation, dated November 4, 2006, No. 642, “On the List of the Goods, Works, and Services for the State and Municipal Purposes Ordered from an SME.”

Measures on protecting SME rights and interests during government revisions

There are only a few issues related to measures on protecting the rights and obligations of SMEs during control (supervision) by state authorities. The federal law “On Protecting the Rights of Legal Entities and Entrepreneurs During State Control (Supervision),” dated August 8, 2001, No. 134-FZ, contains only a single provision that, with respect to SMEs, supervision may be not declared earlier than three years after the date of the state registration of the respective SME.


The Federal law No. 294-FZ, “On Protection of the Rights of the Legal Entities and Entrepreneurs During Exercising State Control (Supervision), Municipal Control,” dated December 26, 2008, which came into effect on July 1, 2009, contains another provision that: “... with respect to the one SME the total term of the planned on-site revision shall not exceed fifty hours for an SME and fifteen hours for a micro-enterprise per year.” (part 2 of the Article 13)

Other forms of government support

Article 16 of the Statute introduces a list of forms of government support for SME. The list includes, among other things, the following: financial; property; informational; consulting; support in the area of preparation, retraining and improvement of professional skills of SME employees; support in the area of innovations and industrial production; support of an SME whose main business is related to foreign trade; and support of SMEs that carry out agricultural activity.

Issues related to competition legislation

The Letter of the Federal Antimonopoly Service (FAS) of the Russian Federation, No. АК/2550-pr, dated October 17, 2008, informs entrepreneurs of new measures proposed by the government for increasing benefits for SMEs. According to the Letter, up to July 1, 2010, the procedure of repeated tenders is not required for the prolongation by SMEs of existing lease agreements. Likewise, a prolongation of such lease agreements is possible only until July 1, 2010.

Financial maintenance of measures

The Decree of the Government of the Russian Federation No. 249, dated April 22, 2005, “On Conditions and Procedure of Rendering Assets of Federal Budget for the Government Support of Small Enterprises and Farming Enterprises,” provides the rendering of government grants, for example, for the creation and development of business incubators. The Decree introduces provision of grants for supporting businesses that manufacture and sell goods (works, services) for export as well as provisions of grants for the development of crediting systems of SMEs.

Regions of the Russian Federation

The regions of the Russian Federation are taking proactive position in adopting programs of support for SMEs. For example, there are several government authorities in Moscow that were initially created for supporting SMEs. Among them are: the Department of Support and Development of Small Enterprises, and the Commission on Financial and Property Support of Small Enterprises.

In January 2006, the non-profit organization the Fund of Assistance for the Accreditation of Small Enterprises was created in Moscow. The main purpose of its activity is to provide state guarantees regarding credit, loan, and lease agreements for SMEs.

In other areas of Russia, measures for supporting SMEs are proactively being taken as well. According to the Statute, the regions are entitled (along with already established forms of support by the federal authorities) to independently render other forms of support at the expense of their own regional budgets.

The Statute provides federal authorities, authorities of Russia’s regions, and municipal governments the right to establish lists of state or municipal property that is free from the rights of third parties (except for property rights of SMEs). The property in such lists can only be provided for SMEs and organizations that form an infrastructure of support for SMEs for use on a long-term basis (these lists must be published in the mass media and online).

It should be said that Decree No. 797, signed by the President on May 15, 2008, “On Urgent Measures for the Liquidation of Administrative Restrictions at Realization of Enterprise Activity, suggests that regional authorities should have the right to define procedures of granting premises to SMEs for rent on a long-term basis. Only those premises that were initially allocated for such purposes can be granted. Premises rented to SMEs can be bought by the SMEs if they were rented for no less than three years, without tender procedure, but with the possibility of payment in installments.

Crediting

Another noticeable act related to SME support is Government Decree No. 1007-r, dated July 27, 2007, which contains Section IV, entitled “Conditions, an Order and Restrictions of Financial Support of Credit Organizations and Legal Bodies in Order of SME Development.” This statute provides that the term of accrediting the SME must be more than two years. The amount of credit cannot exceed 150 million rubles. Vneshekonombank provides guarantees and credits to the credit organizations and the legal entities that are carrying out support for SMEs.

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Analyzing the statutes discussed above, we conclude that a trend for the development of SMEs has been set. However, not everything that has been conceived was realized. It is very likely that the government will further expand benefits and preferences for SMEs in the near future.