Construction and projects in Russian Federation: overview
A Q&A guide to construction and projects law in the Russian Federation.
The Q&A gives a high level overview of the main trends and significant deals; the main parties; procurement arrangements; transaction structures and corporate vehicles; financing projects; security and contractual protections that funders require; standard forms of contracts; risk allocation; excluding liability, including caps and force majeure; contractual provisions covering material delays and variations; appointing and paying contractors; subcontractors; licences and consents; projects insurance; labour laws; health and safety; environmental issues; corrupt business practices and bribery; bankruptcy/insolvency; public private partnerships (PPPs); dispute resolution; tax and mitigating tax liability; the main construction organisations; and proposals for reform.
To compare answers across multiple jurisdictions, visit the construction and projects Country Q&A tool.
This Q&A is part of the multi-jurisdictional guide to construction and projects law. For a full list of jurisdictional Q&As visit www.practicallaw.com/construction-mjg.
Overview of the construction and projects sector
Over the last year the construction and projects market saw a continuation of the upturn that started in 2011, with a general increase in the number of new projects and a restarting of suspended projects.
The general mood of market players is positive due to stable macroeconomic results (that is, in relation to the performance, structure, behaviour and decision-making of an economy as a whole). The majority of market players consider the market as stable and demonstrating calm, with confident growth that is hardly reminiscent of recession.
The most dynamic results were demonstrated in logistics and retail projects. Logistics projects continued their rapid growth and attracted high interest from investors, especially considering that the current average vacancy rate for warehouses is about 1%, which is much lower than for offices and retail premises. It is typical for more than half of any future warehousing to be let out to tenants before even the walls are up. Retail property is also impressive in its results and growth.
Following drastic restrictions on new developments in Moscow, developers have focussed on regional development projects. In addition to logistics and retail, other popular segments are regional residential construction and hotel and leisure facility development. Specialised investors are also particularly interested in:
The health industry.
Manufacture of auto parts and medicines.
Finally, regional airport facilities and infrastructure renovation and reconstruction projects demonstrated a very high investment interest, predominantly from local core investment groups.
Restrictions on the implementation of construction projects without town-planning documents have also gradually started coming into force. For example, from 2013, construction permits in most cases must not be issued without licences/consents for acquisition of land use and development (see Question 19). These restrictions have been constantly postponed over the last few years, though the legislator has finally allowed them to enter into effect. This has forced local authorities to speed-up the preparation of the long-awaited town-planning documents.
Amendments to the Federal Town-Planning Code (Federal Law No. 190-FZ of 29 December 2004) (Town-Planning Code), intended to establish a clear liability structure for town-planning activities, have also entered into force in 2013. The Code imposes default liability for any harm caused by damage to or destruction of a facility on the developer during construction and the owner after commissioning.
The main projects include:
PPF launched a development of CommCity in the South of Moscow (with an investment of about EUR1 billion).
AIG/Lincoln unveiled its plan to develop the North Point Park.
Forum Properties disclosed its plans to develop Phase III of the Avrora Business Centre.
Development of the IQ Quarter by Hals-Development in Moscow.
Development of large scale agro markets in Moscow and St Petersburg (that is, superstores similar to Rungis or Mercamadrid).
The launch of a development of branded entertainment/theme parks (Universal, DreamWorks, Kidzania).
Plans to redevelop the Soviet-era National Exhibition Centre (with an investment of about US$2 billion).
Major projects in Russia have involved large development groups (such as O1, Kortros, Regions Group and Amtel (all of which are considering initial public offerings (IPOs) in the next few years)). Hines International has unveiled its plans to invest US$1 billion in Russia in 2013. There have also been projects and works to restore historical heritage mansions in Moscow.
The main parties involved in a project are the:
Developer. The developer is the key party in the overall process. The developer must either own or lease the relevant land plot. The developer is, by default, the party liable for the entire construction process, unless it appoints other professionals to perform and supervise the work.
Generally, the developer appoints the other professionals involved in the project (project designer, general contractor/contractors for certain types of works and technical employer (see below).
Project designer. This is the professional responsible for preparing the design documentation and, as a rule, arranging for expert assessment of the design documentation. The project designer can appoint sub-designers to elaborate specific sections of the design documentation.
General contractor. The general contractor's main role is to provide for organisation and co-ordination of construction process on site and be liable for the safety requirements on site. The general contractor usually also carries out the bulk of the work and employs subcontractors for specific work.
Technical employer. This is the party with expertise in exercising construction supervision (for example, inspection of completed works and their quality).
The developer generally enters into the following agreements when implementing a project:
A contract with the designer for development of the design documentation.
A construction contract with the general contractor for construction of the facility.
A contract with the technical employer for technical supervision over the design and construction, selection and involvement of third parties in implementing the project, reporting to the supervisory authorities, and so on.
The following forms for transactional relations are also frequently used:
A single contract for design and construction. This form is inconvenient owing to the requirement for the general contractor to have a Certificate of Admission (a type of licence) for both design work and general contracting work.
Construction on a turnkey basis (that is, the facilities are constructed and delivered ready to use) at a fixed price, including engineering, procurement and construction (EPC) (see Practice note, Procurement route: EPC or split EPC).
Agreement on comprehensive construction management, including engineering, procurement and construction management (EPCM).
These arrangements are generally the same if some or all of the main parties are international contractors or consultants.
The main forms of transactional structure and vehicle are relatively simple:
Construction contract. Employment of a construction contractor by a developer.
Shared construction agreement. This is a heavily regulated variation of the investment agreement. It aims primarily to protect investors' interests and public order. This type of agreement is mandatory for residential development involving investment by individuals. Companies can agree to use this agreement. However, developers are not enthusiastic about using this concept, because of the burdensome reporting and liability obligations.
Corporate forms. If a special purpose vehicle (SPV) is created for the purposes of the project, the traditional corporate form used is a limited liability company (LLC).
Transaction structures are generally the same for both local and international contractors or consultants. However, international projects involve more sophisticated corporate and finance structures. In particular, corporate structures managed from a foreign jurisdiction (for example, Cyprus, BVI, Jersey, Guernsey and The Netherlands) are increasingly used. Use is sometimes made of vertical structures, made up of several special purpose companies, to comply with statutory limitations on foreign involvement.
Before the economic downturn, most real estate projects were funded through bank loans, where the role of international banks was hard to overestimate. Currently, the most active on the real estate market are the largest local banks and professional investors who lend for development of the most marketable projects that are close to completion. Another standard financing method is equity.
Initial public offerings (IPOs) are not currently considered, due to the current economic situation. In addition, instruments such as mezzanine finance, forward financing and bond issues are currently less common.
Security and contractual protections
Funders typically require that one or several of the following forms of security be used to protect their investments:
Mortgage. The most commonly used security is a mortgage of the land plot on which construction is carried out (or a mortgage of the lease right if the plot is held on a leasehold basis), together with a mortgage of the construction facility.
Pledge. This is a pledge of shares in the company constructing the facility and owning the land, or in that company's parent.
Other forms of security. These include pledge of assets, pledge of bank accounts and receivables, bank guarantees and parent company guarantees. In addition, pledge of the employer's rights to contract for construction has recently been introduced to secure guarantees. Even so, this instrument is insufficiently covered under Russian legislation and relevant enforcement practice has not been established to date.
If the investments drawn into the construction project are subject to foreign law, contractual tools such as warranties, step-in rights and assignments of contractual rights are used.
Standard forms of contracts
There are no Russian standard forms of contract. Major local industrial projects, particularly those financed by foreign banks and financial organisations, generally use standard forms of contract developed by the International Federation of Consulting Engineers (Fédération Internationale Des Ingénieurs-Conseils) (FIDIC). For more information, see Practice note, FIDIC Forms of Contract. However, these require thorough adaptation to local regulatory, reporting, tax and bookkeeping requirements, among other things.
Construction contracts for international projects usually consist of FIDIC models adapted to Russian legislation. This applies, in particular, to infrastructure and industrial projects. For more information, see Practice note, FIDIC Forms of Contract.
The main risk the contractor faces is that of accidental loss of, or damage to, the construction facility before it is accepted by the employer/developer (except in cases where the construction facility is destroyed or damaged because of poor quality material or equipment supplied by the employer or execution of incorrect instructions from the employer). This risk is normally managed by taking out insurance.
In relation to the materials and equipment provided by the contractor, the contractor bears the risk of accidental loss or damage and the risk of being unable to use those materials and equipment in the construction. These risks can also be mitigated by insurance.
If the price of the contractor's work is fixed under the contract with the contractor, the contractor bears the risk of additional unforeseen costs arising during construction. This applies even in relation to costs that cannot be accurately calculated when the contract is concluded.
Liability for non-performance and bearing of risk are differentiated under law. That is, in the event of force majeure (see Question 10), the contractor is released from liability but continues to bear the risk of accidental loss of, or damage to, the construction facility.
The contractor can limit its liability to the following:
Reimbursement of actual damage only (excluding lost profits). As a rule, this restriction is used in the construction of large scale industrial facilities, such as power plants.
Reimbursement of specific types of actual damage only.
Liability if found culpable only. Under Russian law, in relations with commercial organisations, liability is usually imposed irrespective of fault, unless the parties agree otherwise.
Caps on liability
In most cases, the law does not prohibit the parties from setting a cap on liability, including a fixed amount. However, in practice, a monetary limit is applied very rarely and the parties usually limit their liability by other means (for example, they provide for reimbursement of actual damage only, without covering lost benefits, interest and so on) (see Question 8)).
Under Russian law, force majeure releases parties from liability. Russian law outlines the key characteristics that constitute force majeure but does not list force majeure events specifically. Situations that are urgent and irresistible can constitute force majeure. The following events may be treated as force majeure:
Acts of war.
Acts of public authorities.
Other public events relating to force majeure circumstances.
In addition, the law specifies circumstances that cannot be considered force majeure, in particular:
Breach of duty by, for example, subcontractors and suppliers of materials and equipment.
Lack of a sufficient market for supplying the goods, including materials, construction and equipment.
Lack of funds.
The parties usually establish a penalty for delayed construction. The penalty may be determined as either a:
Percentage of the amount of work not completed on time.
Fixed amount for a specific period of delay.
Russian legislation provides for the employer's right to terminate a contract if the contractor either:
Delays launch of the work.
Performs the work so slowly that it is impossible to meet the deadline.
In addition, the contract often provides for the employer's right to terminate the contract if there is a significant delay in the contractor's execution of the works. In this case, the employer can also claim damages from the contractor.
Performance bonds, insurance, banks and parent company guarantees are also used extensively in construction projects.
Construction and related works should be carried out in accordance with the design and technical documentation defining the scope, content and other related requirements. This should be supplied with a calculation of the cost of works. The employer has the right to amend the design and technical documentation on the condition that the cost of any additional work caused by the amendment does not:
Exceed 10% of the total costs listed in the calculation.
Change the nature of the works under the contract.
Revisions of a greater scope are subject to agreement between the parties.
Other negotiated provisions
The following terms and conditions are the most heavily negotiated:
Costs and payment schedule in relation to the works (for example, advance, interim and final payments).
Timing of work performance and liability for failure to meet intermediate deadlines.
The parties' liability for failure to meet the contractual terms and conditions.
The procedure for conveyance of risks and works acceptance (that is, whether the employer/developer accepts the works and relevant risks phase by phase or accepts all the works and risks only on completion).
Architects, engineers and construction professionals
If the employer is a commercial organisation, contractors and other construction professionals are usually selected by either a:
Binding tender. The employer and the best bidder must conclude a contract. It is not mandatory to hold a tender in relations between commercial organisations, although bidding is frequently used in practice.
Non-binding tender (request for proposals). The employer gathers proposals from potential contractors and retains the right to refuse to enter into a contract with the best bidder.
In the public sector, selection of a contractor is usually made on the basis of a binding bidding procedure, which is usually very formal, strictly regulated and differs from the tender procedures held by commercial organisations.
Payment for construction work
Methods of payment
The procedure for paying for construction work is based purely on the contractual provisions. It is similar in most construction projects and consists of the following:
An advance payment (or several advance payment instalments, usually used for site preparation, purchase of materials and so on). The advance payment does not usually exceed 10% to 15% of the total cost of the work and is usually secured by a bank guarantee. These advances are usually set off proportionately during subsequent payments.
Interim payments for interim works carried out as construction progresses. These payments can be made periodically (for example, on a monthly basis, on acceptance/inspection of completed works at the main stages of construction or according to a schedule). The interim payments are reduced by proportionate amounts of the advance payment and retentions.
Retention payable on completion and the employer's final acceptance of the facility. The size of this retention is usually 5% to 10% of the total cost of the work.
Retention payable on expiry of the guaranteed operating period (usually amounting to no more than 5% to 10% of the total cost of the work). This retention is generally replaceable with a bank guarantee in the same amount.
Payment to the contractor for the work performed is secured by the contractor's lien right set by law. This entitles the contractor to retain the following until the payment is made:
The result of the work.
The rest of the materials provided by the employer.
Any other property of the employer.
However, this right is only applicable when the work is fully and properly performed.
See also above, Methods of payment.
The general contractor generally engages subcontractors to perform certain types of work without seeking the employer's prior consent. The parties may agree that the general contractor should seek the employer's prior consent for engaging subcontractors or agree on the list of potential subcontractors in advance. For example, information on approved subcontractors can be specified in the general contractor's offer for participation in the tender.
In both cases, the general contractor continues to be liable to the employer for work performed by subcontractors as if it had performed the work itself.
The employer does not usually interfere in the relations between the general contractor and its subcontractors. The general contractor and the employer can, however, agree that the employer will employ and pay the contractors directly. In this case, the general contractor is not liable for the works performed by direct contractors, these being liable towards the employer.
In certain cases, subcontractors must have a Certificate of Admission issued by a relevant self-regulating organisation (SRO) (that is, an organisation that exercises some degree of regulatory authority over a specific industry or profession) (see Questions 2, 18 and 19).
On 1 January 2010, reform of the regulation of construction activities came into force, together with a transition from licensing of construction activities to self-regulation. The key regulation governing self-regulation in construction works is the Town-Planning Code.
Construction work affecting safety can now only be performed by parties holding a Certificate of Admission issued by a relevant SRO (see Question 19). The SRO consists of professional developers. Before the reform, licences were issued by state agencies. There are more than 370 types of work requiring a Certificate of Admission, ranging from engineering surveys and preparation of design documentation to specific construction works and works associated with organising construction.
In most cases, the general contractor, the designers and the technical employer should be members of an appropriate SRO and hold a Certificate of Admission issued by a relevant SRO.
Before construction work is launched, all of the following must be obtained for the project:
Depending on the type of project, one of the following:
for linear facility developments, a development plan and draft boundary survey. These are types of territorial planning and zoning document that should be adopted at the local level. In practice, developers often have to arrange development of such documents themselves;
for non-linear facility developments, a town-planning plan of the land plot. This is a territorial zoning document identifying the main characteristics of the site, including the types of permitted use and permitted construction options.
The requisite set of design documents and a positive expert opinion on these. This is not required for some minor projects. Usually, it is the designer who organises the expert assessment.
The technical conditions for connection to the public utilities infrastructure (that is, electricity, gas, water, sewerage, and so on).
A construction permit issued by local or federal authorities, depending on the project's scale. The construction permit is, as a general rule, obtained by the developer.
During construction, the construction supervisory authority (either regional or federal, depending on the project) carries out inspections in accordance with the schedule specifically issued for each construction site. For some minor construction projects, state construction supervision is not carried out.
On completion, all the following must be obtained for the project:
A report on the facility's compliance with the requirements of the technical regulations and design documentation (this report is commonly referred to in Russia as a ZOS). The ZOS is issued by a state construction supervisory authority following a final inspection. No ZOS is required for some minor construction projects, where state construction supervision is not carried out. The general contractor usually obtains the ZOS.
An operating permit for the facility. This is the main, key document issued to the developer by the state authority or local government, confirming completion of construction and the facility's capacity to operate. The operating permit is issued on the basis of the ZOS and a number of other requisite documents (including confirmation from the utility suppliers that the utility connections have been properly implemented).
Self-regulating organisations (SROs) generally establish insurance requirements. In practice, the parties also agree that additional insurance must be obtained. Obtaining insurance is usually the responsibility of the contractor, although it is sometimes imposed on the employer, for example, when the construction is covered under the employer's general insurance (including international insurance, primarily if the employer is an organisation operating in several countries).
The following types of insurance are usually maintained:
Insurance of construction risks. This includes the risk of accidental damage to, or loss of, the facility under construction and materials, equipment and other property located on the site.
Liability insurance for injury caused during the work (third party liability insurance).
SROs require insurance to be maintained as a condition for membership and also to reduce the burden on SRO funds. This is because, under the legislation, an SRO is subject to secondary liability for damage caused by its members and must pay out of its indemnification fund.
No special insurance is generally taken out by employers as the General Contractor is the party that effectively controls the construction site.
Local construction workers must:
Be at least 18 years of age to perform work under certain professions (the list of professions is established by the federal government).
Pass any relevant health examinations, for example, when working in hazardous locations.
Have the relevant permissions required for performing work on certain mechanisms, equipment or machines.
Certain hazardous professions cannot be held by women (the list of such professions is also established by the federal government).
There are no other general limitations on employment of Russian citizens.
Foreign nationals can be employed if they are over 18 years of age and have a work permit issued by the Federal Immigration Service.
Work permits are issued for a term not exceeding one year (or three years for highly specialised workers), on the basis of immigration quotas fixed annually by the federal government. Quotas do not apply to all highly specialised workers and regular workers of certain positions, a list of which is established each year by the Ministry for Health and Social Development. A foreign national employee is likely to be considered highly specialised if his average annual income is at least RUB2 million.
Foreign nationals can work without a permit provided both:
They are employed by a foreign company engaged in producing or selling goods.
Their work involves:
equipment installation services;
technical support services; and/or
warranty services or technical support for equipment delivered to Russia.
The federal Labour Code is the main legislation regulating labour relations. This establishes mandatory requirements on maximum working hours, night work, payments and so on. For example (Labour Code):
The normal duration of the working week must not exceed 40 hours.
Salary should be paid at least every two weeks.
Holiday entitlement is at least 28 calendar days per year.
Additional guarantees (for example, shortened working week, prohibition of work at night and overtime work, and so on) are provided for certain categories of employee (women, minors, and so on).
Employees can be engaged on either a:
Fixed-term contract. Under this, employees can only be employed by the employer on specific grounds set out in the Labour Code. There is no statutory compensation payment on expiry of the fixed term.
Employment contract for an indefinite term. Under this, employees can be dismissed by the employer exclusively on grounds set out in the Labour Code. Depending on the situation and the chosen grounds for termination, the maximum statutory redundancy payment is five months' average salary.
Health and safety
Health and safety laws are set out in numerous laws and standards. The main health and safety regulations applicable to construction work are set out in the:
Construction Standards and Rules 12-03-2001 and 12-04-2002 on work safety in construction.
Sanitary Regulations and Standards 188.8.131.524-03, which sets out sanitary rules for construction work.
Technical regulations on fire safety requirements, established by Federal Law No. 123-FZ dated 22 July 2008.
Government Regulation on health limitations for women working in construction No. 162 dated 25 February 2000.
Government Regulation on health limitations for minors working in construction No. 163 dated 25 February 2000.
The employer's basic obligations are to:
Provide working conditions meeting the standards of the occupational health and safety, work and rest regime established by the labour laws.
Purchase special clothing for employees' personal protection.
Provide technical training for employees on safety.
Ensure periodical medical examinations of employees.
Ensure testing and certification of workplaces.
Appoint a special labour safety officer.
The following local laws, among others, regulate the effect exerted by projects on the environment:
Federal Law No. 7-FZ of 10 January 2002 "On Environmental Protection". This is the main piece of legislation.
The Land Code (Federal Law No. 136-FZ of 25 October 2001).
The Town-Planning Code.
The Forest Code (Federal Law No. 200-FZ of 4 December 2006).
Federal Law No. 33-FZ of 14 March 1995 "On Natural Areas of Preferential Protection".
Federal Law No. 52-FZ ""of 30 March 1999 "On the Sanitary and Epidemiological Welfare of the Public".
Federal Law No. 101-FZ of 24 July 2002 "On Farm Land Turnover".
Air pollution is regulated by Federal Law No. 96-FZ of 4 May 1999 "On Protection of Atmospheric Air". See also above, Local laws.
Water pollution is regulated by:
The Water Code (Federal Law No. 74-FZ of 3 June 2006).
Federal Law No. 416-FZ of 07 December 2011 "On Water Supply and Sewerage".
See also above, Local laws.
Waste is regulated by:
Federal Law No. 89-FZ of 24 June 1998 "On Production and Consumption Waste".
Federal Law No. 190-FZ of 11 July 2011 "On Radioactive Waste Handling".
See also above, Local laws.
Environmental impact assessments (EIAs)
See above, Local laws.
See above, Local laws.
There are no construction-specific corruption laws in Russia.
Individuals can be penalised for:
Taking bribes. Depending on the circumstances of the crime, punishment can range from a fine to imprisonment for a maximum of 12 years.
Giving bribes. Depending on the circumstances of the crime, punishment can range from a fine to imprisonment for a maximum of eight years.
Intermediation in bribery. Depending on the circumstances of the crime, punishment can range from a fine to imprisonment for a maximum of 12 years.
Legal entities can be held administratively liable with a fine of up to 100 times the amount of the bribes, but not less than RUB1 million. In addition, a legal entity's officers can be criminally prosecuted.
Illegal transfer of money or any other assets to a company manager in order for him to take actions in the interests of the transferor is punishable by:
A fine of up to 70 times the amount transferred.
Imprisonment for up to six years.
Illegal receipt of money or any other assets by a company manager in order for him to take actions in the interests of the transferor is punishable by:
A fine of up to 90 times the amount received.
Imprisonment for up 12 years.
A contractor's bankruptcy or insolvency does not generally constitute grounds for the other party to withdraw unilaterally from the contract by law. For the employer, the main consequence of the contractor's bankruptcy is that:
The contractor's obligations become due and payable (if the contractor has payment liabilities).
There will be a change to the contractor's management at certain stages of bankruptcy (for example, the company's chief executive officer (CEO) is replaced with a bankruptcy manager appointed by a court).
However, contractual agreements usually provide for the right of unilateral withdrawal from the contract in the event of the contractor's bankruptcy or insolvency.
In the last few years, Russia has increasingly considered PPPs and the need to develop them further.
A number of major PPP projects involving construction of plants for waste processing, road construction and upgrading of airports have recently been launched. These projects, with a few exceptions, are structured as concession agreements. PPP is also used at the local level in municipalities, mainly in relation to utility services and social welfare facilities.
However, Russian legislation requires amendments to provide for implementation of PPP models commonly used worldwide (for example, build, own, operate, transfer (BOOT) and build, transfer, operate (BTO) models, and so on). A legislative framework is currently being developed for application of some PPP tools, such as concession agreements, production-sharing contracts and so on.
Major laws governing PPPs are the:
Federal Law No. 115-FZ of 21 July 2005 "On Concession Agreements".
Federal Law No. 94-FZ of 21 July 2005 "On placing orders for goods, works and services for state and municipal needs". (From 1 January 2014, this will be replaced by Federal Law No. 44-FZ of 05 April 2013 "On the Contract System for Procuring Goods, Works and Services for State and Municipal Needs".)
Federal Law No. 223-FZof 18 July 2011 "On procurement of goods, works, services by certain types of the legal entities".
Federal Law No. 225-FZ of 30 December 1995 "On Production Sharing Agreements".
Federal Law No. 39-FZ of 25 February 1999 "On Capital Investments in the Russian Federation".
Regional legal acts on PPP.
In 2010, to develop PPP in Russia, the PPP Expert Council of the State Duma (the lower chamber of the Federal Parliament) developed a model law on PPP. This encouraged the regions to adopt their own regional PPP legislation. About 60 regions out of 83 have adopted regional PPP legislation.
In addition, a series of amendments to the federal legislation aimed at further strengthening and developing PPP in Russia is currently under discussion. It is expected that a Federal Law "On PPP" will be adopted in 2013 or 2014.
The procurement/tender procedure is regulated by statute for a few PPP forms and differs, depending on the PPP form:
Concession agreements. Conclusion of concession agreements is based on a tender with pre-selection (that is, before the bids are analysed, the bidders' qualifications are verified). Standard concession agreement patterns for certain facilities (such as transport facilities) require federal government approval.
State orders. State orders are usually awarded on the basis of bidding (although other processes may also apply). The procedure for bidding is regulated by law and each bidding stage, including the time line, is regulated in detail. The bidding process includes:
publication of an invitation to bid;
submission of bids by bidders;
consideration, evaluation and comparison of the bids;
selection of the winner.
Production sharing agreements. A special tender procedure, usually an auction, exists for conclusion of production sharing agreements, though this form is now not used in practice.
Some Russian regions' laws also include rules governing tenders for the right to conclude PPP agreements.
The tender procedure is currently controversial and disputable in practice. This is because certain different laws establish inconsistent and separate rules for tendering, for example, in relation to land procurement.
Formal dispute resolution methods
The majority of disputes are settled in state arbitration (commercial) courts.
If the contract includes commercial arbitration clauses, disputes between the parties are referred to the appropriate court of arbitration (see below, Courts and arbitration organisations). The state arbitration court's decision is binding and, generally, can only be challenged in a state court on procedural grounds.
Courts and arbitration organisations
There are no special courts to deal with construction disputes, which are usually resolved by state arbitration (commercial) courts.
Foreign parties often establish a contractual clause requiring adjudication in an arbitration court of the International Chamber of Commerce (ICC), the International Commercial Arbitration Court (ICAC) under the Chamber of Commerce and Industry of the Russian Federation or other international arbitration institutions.
For more information on arbitral institutions, including the ICC, see Practice note, A quick guide to the rules of the leading arbitral institutions.
In 2010, the Federal Law "On the Alternative Dispute Resolution Process Involving a Mediator (Mediation)" came into force and appropriate changes were made to the Arbitration Procedural Code. In particular, mediators can now be engaged in resolving disputes even if the Court of Arbitration has already begun the trial. The main purpose of the law is to offer a fast and convenient method for resolving disputes, which is flexible and ensures that enforceable decisions can be made during mediation to save costs.
Value added tax (VAT)
The VAT on transfer (sale) of real estate is generally 18%. No other transfer or turnover taxes apply to transfer of real estate, except for nominal stamp duties and profits tax charged at 20% on any realised gain.
Sale of land plots is VAT exempt.
Special rules exist for calculating VAT in cases of investment agreements, construction funded with the developer's own resources and other specific types of agreement.
Developers face a considerable amount of input VAT during construction, which be refunded on completion. The Russian Tax Code allows developers to recover the difference between input and output VAT in cash. However, the tax authorities tend to refund large amounts of input VAT only by court order (that is, litigation is required).
Recently, an improvement has been seen in this area, with many clients reporting increased chances of refund in cash being obtained without litigation.
Agreements for the avoidance of double taxation
Many double taxation treaties (DTTs) signed by Russia establish a period within which a construction site cannot be deemed to be a permanent establishment of the developer. Income tax is not due during this period. The conditions for application of tax benefits under the relevant DTT should, however, be carefully reviewed, as the Russian tax authorities tend to challenge application of these tax privileges.
Interest deduction for loans is limited to:
For foreign currency loans: 0.8 times the Central Bank rate. Based on the current Central Bank rate of 8.25% per year, the interest deduction is effectively limited to 6.6% per year.
Rouble loans: 1.8 times the Central Bank rate. Based on the current Central Bank rate of 8.25% per year, the interest deduction is effectively limited to 14.85% per year.
The Central Bank rate is determined on the date of receipt of the borrowed funds (for borrowings establishing a fixed rate for the duration of the loan) or on the date of interest deduction (for other borrowings). Certain DTTs allow for unlimited deduction of interest as long as it is at arm's length.
Russia also has thin capitalisation rules. These apply to Russian companies with direct or indirect foreign ownership exceeding 20% of the Russian company's capital. For these companies, deduction of interest is restricted on loans either:
Received from its direct or indirect foreign parent or Russian affiliated companies of its parent.
Guaranteed by such a parent or Russian affiliated company.
In this case, deduction of interest arising under controlled loans is restricted if the loan exceeds three times the borrower's net assets (or 12.5 times for banks and leasing companies), calculated according to Russian accounting rules. Interest exceeding these limitations is reclassified as dividends for profits tax (withholding tax) purposes.
In the landmark Severny Kuzbas case, the Supreme Arbitration (Commercial) Court ruled that non-discrimination provisions, as well as other DTT provisions, do not prevent domestic anti-abuse regulations, including thin capitalisation rules, from applying (see Resolution of the Supreme Arbitration (Commercial) Court No. 8654/11 dated 15 November 2011).
Currently, courts tend to uphold the tax authorities in applying thin capitalisation rules without regard to DTT non-discrimination provisions. This approach is a 180-degree change in position by courts, which previously granted protection against thin capitalisation rules under various interpretations of DTT provisions.
In another case, a cassation court upheld extension of the rules to loans from a sister company (which are technically beyond the scope of the rules due to their wording) on the basis of the general argumentation that the arrangements were conduit in nature (see Resolution of the Federal Arbitration (Commercial) Court for the Moscow Circuit No. A40-1164/11-99-7 dated 27 February 2012). The overall trend is for courts to scrutinise transactions under the substance-over-form approach, which might jeopardise use of various intercompany arrangements aimed at avoiding thin capitalisation rule exposure. On the basis of the mentioned case law developments, compliance with the thin capitalisation rules is going to become an issue to consider when structuring financing for projects.
The following methods are commonly used to mitigate tax liability:
Establishment and use of a special purpose foreign legal entity (SPV) in a jurisdiction, with which Russia has signed a DTT. This SPV acts as the parent (holding) company of the Russian developing company. In the event of exit from the project, the shares in the Russian developer or the shares in the SPV itself can be sold, allowing Russian tax on realised capital gains to be avoided.
Use of internal borrowing to increase additional tax-deductible interest expenses (see Question 34).
Construction and use of real estate through a branch of a foreign company with a permanent establishment in Russia. This avoids Russian withholding tax on distribution of profits out of Russia, limitations on distribution of the originally invested capital and technically exempts the foreign company from Russian thin capitalisation rules.
There are a number of regional investment incentives allowing profits tax and property tax reduction for investors providing capital investment in selected industries and /or above certain amount thresholds.
Costs of land regeneration and environmental protection reduce the profits tax base.
Other requirements for international contractors
Since 2010, companies that perform design and construction no longer need to be licensed in Russia. These companies must now be members of an SRO and obtain a Certificate of Admission to perform the relevant works (see Questions 18 and 20).
This applies equally to both Russian and foreign companies.
Real estate construction is generally regulated by the national legislation. In particular, this greatly affects application of the FIDIC model contracts, which are subject to material adaptation and adjustment.
In addition, the rules for employing foreign and Russian workers must be complied with (see Question 21).
Reform and trends
The current legislation on construction and projects may be affected by the overall reform of the civil law currently under discussion. This includes significant amendments to the Civil Code, for example in terms of rights to land plots for construction, authorised construction and the rights to real estate facilities under construction. However, reform has slowed down somewhat and the timeframes for new amendments coming into force are unclear.
A substantial reform of the land and town-planning legislation is also currently being considered. These are intended to simplify the implementation of construction projects and include, among other things:
Limiting the list of facilities falling under specifically stringent requirements (extremely hazardous, technically complex, and so on).
Setting a list of construction works that can be performed before a construction permit is obtained.
Simplification of the procedure for obtaining the construction permit.
The changes are also intended to distribute duties more clearly between authorities responsible for land formation and for town-planning regulation.
Lawmakers are discussing the opportunity to use design documents that have passed examination in the EU for construction in Russia without local examination, and therefore avoiding double examination.
Finally, the laws regulating PPPs are under discussion for amendment, for example, to increase the investment appeal of PPP projects.
New trends affecting projects include:
A stable microeconomic situation.
Moderate market growth.
Regional expansion of retail and logistics developers.
Debt financing of development projects by Russian banks.
Infrastructure development projects.
Greater Moscow's control of about 85% of investments in real estate, on a national scale.
Main construction organisations
Federal Agency for Environmental, Technical and Nuclear Supervision (Rostechnadzor)
Main activities. This has executive authority in relation to industrial safety, atmospheric protection and environmental expert examinations.
W www.gosnadzor.ru (website in Russian only)
International Construction Alliance
Main activities. This is an example of an accredited self-regulating organisation (SRO) in the construction industry. (There are more than 230 accredited SROs in the construction industry, more than 160 accredited SROs in the design industry and 28 accredited SROs in the civil engineer surveyor industry.)
W www.sro-mas.ru (website in Russian only)
Vitaly Mozharowski, Partner
Goltsblat BLP LLP
Professional qualifications. Russia, 1997
Areas of practice. Real estate and construction; investment projects.
- Comprehensive legal advice for Sheremetyevo International Airport (Moscow) on airport asset consolidations, reconstruction of terminals and construction of an underground tunnel under the airfield and airport expansion matters.
- Advising Saint-Gobain on various legal matters relating to three deposits of mineral resources and plant construction in the Southern, Volga and Urals regions.
- Construction of a brand new plant for TEVA Pharmaceuticals, land acquisition, spatial planning, design and construction.
- Acquisition and development of three land sites in various regions for Kronospan, including construction of new wood processing plants, land acquisition, spatial planning, incentives, construction, financing, corporate matters and so on.
- Construction of a brand new office building in Moscow, including pre-leases for AB Development Group.
Inna Firsova, Head of Group
Goltsblat BLP LLP
Professional qualifications. Russia, 2004
Areas of practice. Real estate and construction.
- Advised on the legal aspects of laying the Russian seabed pipeline including in relation to construction, permits, licences, water use and environmental protection, use of water bodies and specially protected natural territories.
- Advised Saint-Gobain on legal matters related to plant construction in Volga region.
- Legal support for Phase II construction project of a Kimberly-Clark manufacturing facility in Russia, including legal advice on due diligence, permission issues and drafting contractual documentation.
- Provided legal advice on Data Space reconstruction in Moscow (project structuring, construction, permission documentation and other matters).
- Legal support for development of a Logistics Park in the Moscow Region, in particular, structuring the legal concept of the project, permissions, construction and contractual matters, including preparation of a complete set of construction-related contracts.
- Legal support for Lafarge greenfield projects in different regions of Russia, including land, construction, utilities matters, liaising with the authorities, licences and contractual legal matters.